In a distressing development, the poverty headcount in Pakistan is estimated to have reached 39.4% in FY23—more than 5 percentage points higher than in FY22, amid slowing growth and high inflation, revealed World Bank in its report titled ‘Pakistan Development Update: Restoring Fiscal Sustainability’ released on Tuesday.

The significant increase in poverty is due to reduced economic activity and incomes, record-high food and energy prices, disruption to services and loss of crops and livestock during the catastrophic 2022 floods, the World Bank said in the section labelled ‘Poverty’.

The World Bank, in its disclaimer, also mentioned that the last Household Integrated Economic Survey (HIES) that allowed accurate measurement of poverty took place in 2018.

“A new survey is needed to update the poverty headcount,” it said.

The development comes at a time when Pakistan is facing a massive economic crisis with a Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) only giving a few months of breathing space to policymakers. However, while the economy teeters, high inflation has led to a severe rollback of demand and economic activity, leading to frequent shutdowns of industrial units and scaling back of operations.

At the same time, a fast-depreciating rupee – it only gained in value during September – has caused real incomes to fall, with last-year’s floods adding to economic distress. Similarly, higher power tariffs and fuel prices have only aggravated the situation in households.

Meanwhile, the report highlighted that over 80% of poor workers in the country rely on agriculture, manufacturing, construction, and trade sectors for employment. “Muted economic activity in these sectors has had negative impacts on job quality and labour incomes for poor households and for those at risk of falling into poverty,” it said.

Moreover, the real value of remittances from abroad has also declined, noted the report.

“At the same time, food inflation nearly tripled, reaching an average of 38.7% in FY23.

Higher energy prices will maintain domestic price pressures and may contribute to growing social and economic insecurity: World Bank

“As a result, households’ real incomes and purchasing power declined. This is particularly true for poor and vulnerable households, which spend roughly half their budgets on food, with households in the poorest decile experiencing a 7-percentage point higher inflation rate than the richest decile,” noted the report.

The report projected poverty reduction to be gradual in the medium term, owing to weak growth and lower labor income, persistent inflation (especially for food and energy), and lower remittances.

“The poverty headcount rate, measured at the lower-middle-income country poverty line of US$3.65/day 2017 PPP, is expected to decline to 37.2% in FY24 and further to 35% in FY25 on resumption of growth and economic activity.

“However, the higher energy prices will maintain domestic price pressures and may contribute to growing social and economic insecurity,” the report added.

World Bank warned that protracted and elevated food and energy price inflation, in the absence of substantial growth, could cause social dislocation and have negative welfare impacts, especially on the worse-off households with already depleted savings and reduced incomes.

“Increased targeted transfers will play a vital role to protect the poorest from these risks,” it noted.