World Bank lowers GDP forecast, projects higher inflation in FY22

ISLAMABAD: The World Bank has lowered the GDP growth projection for Pakistan by 0.1 percent, i.e., from estimated 3.5 percent in fiscal year 2021 (against Pakistan's claim of 3.94 percent) to 3.4 percent for fiscal year 2022, while inflation is projected to edge up with expected domestic energy tariff hikes and higher oil and commodity prices.

The World Bank in its latest report, "The latest South Asia Economic Focus titled Shifting Gears: Digitization and Services-Led Development", stated that in Pakistan, the GDP is estimated to have grown by 3.5 percent in the fiscal year 2021, an upward revision of 2.2 percentage points compared to the last forecast.

Strengthening private consumption and investment are projected to have driven the overall recovery, while net exports are estimated to have contracted due to strong domestic demand driving import growth.

The GDP growth is expected to ease to 3.4 percent in the current fiscal year, as both expansionary fiscal and monetary measures are expected to unwind. For fiscal year 2022-23, growth will pick up again to reach four percent as major structural reforms are implemented that are expected to strengthen the economy's overall competitiveness. The economic growth is expected to ease in fiscal year 2022 before strengthening again in fiscal year 2023.

However, potential delays in the International Monetary Fund (IMF) programme, high demand-side pressures, potential negative spillovers from the evolving situation in Afghanistan and more severe and contagious Covid-19 waves pose downside risks to the outlook, it added.

WB brings rising food inflation in Pakistan under the spotlight

The 39-month IMF Extended Fund Facility (EFF) programme is likely to resume in fiscal year 2022 with the 6th Review mission expected in October 2021. Key reforms include domestic revenue mobilisation, the reduction of power sector arrears, electricity subsidy reform and more central bank operational autonomy, all of which are expected to strengthen long-term growth.

Major downside risks include delays and stalling of the IMF-EFF programme and the consequent external financing difficulties, exceedingly high domestic demand leading to unsustainable external pressures, more contagious Covid-19 strains requiring widespread lockdowns, and a worsening of regional and domestic security conditions, including those stemming from the Afghanistan situation. All these could delay critical structural reforms, the Bank added.

The Bank further stated that in line with the 25-basis point policy rate hike in September 2021, fiscal and monetary tightening are expected to resume in fiscal year 2022, as the government refocuses on mitigating emerging external pressures and managing long-standing fiscal challenges.

Output growth is therefore projected to ease to 3.4 percent in fiscal year 2022, but strengthen thereafter to four percent in fiscal year 2023 with the implementation of key structural reforms, particularly those aimed at sustaining macroeconomic stability, increasing competitiveness and improving financial viability of the energy sector. Inflation is projected to edge up in fiscal year 2022 with expected domestic energy tariff hikes and higher oil and commodity prices before moderating in fiscal year 2023.

In Bhutan, India, Pakistan, and Sri Lanka, the headline inflation has been higher than historical averages for all months since at least May. Although the latest data for July and August show that headline inflation may be weakening in countries including India and Pakistan, levels are still high relative to historical averages, the report noted.

The surge in food prices in Kabul has also spilled across the border to Pakistan and pushed up food prices there even further. Pakistan is stepping up imports of food staples, including sugar and wheat, to manage food inflation. In Pakistan, average prices in rural areas have risen faster than in urban places (a positive rural-urban inflation difference).

Transport inflation in Pakistan was also above headline during May-July and only came down relative to headline inflation in August. Food prices have also been rising faster than average prices. In Bhutan, Nepal, Pakistan, and Sri Lanka, food price inflation is higher than headline inflation in at least two of the three most recent months.

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Poverty is expected to continue declining, reaching four percent by fiscal year 2023. The current account deficit is projected to widen to 2.5 percent of GDP in fiscal year 2023 as imports expand with higher economic growth and oil prices. Exports are also expected to grow strongly after initially tapering in fiscal year 2022, as tariff reform measures gain traction supporting export competitiveness. In addition, the growth of official remittance inflows is expected to moderate after benefiting from a Covid-19 induced transition to formal channels in fiscal year 2021.

Remittance inflows in Pakistan are still going strong, but year-on-year growth has shown signs of slowing down and is expected to moderate further in the coming months, it added.

Despite fiscal consolidation efforts, the deficit is projected to remain high at 7.0 percent of GDP in fiscal year 2022 and widen to 7.1 percent in fiscal year 2023 due to pre-election spending. Pakistan experienced smaller debt-to-GDP increases during the pandemic than in the previous crisis, with its value already decreasing, due to higher economic growth and currency appreciation against the US dollar.

Implementation of critical revenue-enhancing reforms, particularly the general sales tax harmonisation, will support a narrowing of the fiscal deficit over time. Public debt will remain elevated in the medium-term, as will Pakistan's exposure to debt-related shocks. This outlook assumes that the IMF-EFF program will remain on-track, the report noted.

The report further noted that with the pandemic, the government has been focused on managing the repeated Covid-19 infection waves, implementing a mass vaccination campaign, expanding its cash transfer program, and providing accommodative monetary conditions to sustain economic growth. Grappling with the fourth Covid-19 wave, the government, as before, implemented micro-lockdowns that successfully limited the infection spread, while permitting economic activity to continue and thereby mitigating the economic fallout. While they have been accelerating, vaccination rates remain low. As of September 15, only around 10 percent of the total population has been fully vaccinated.

The report stated that South Asia's recovery continues as global demand rebounded and targeted containment measures helped minimise the economic impacts of the recent waves of Covid-19. But the recovery remains fragile and uneven, and most countries are far from pre-pandemic trend levels.

Pakistan and Afghanistan have lower capacity and are also constrained on the demand side by widespread vaccine hesitancy. Surveys indicate that 35 percent of Pakistanis and 30 percent of Afghans are not willing to be vaccinated, it added.

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The report projects the region to grow by 7.1 percent in 2021 and 2022. While the year-on-year growth remains strong in the region, albeit from a very low base in 2020, the recovery has been uneven across countries and sectors. South Asia's average annual growth is forecast to be 3.4 percent over 2020-23, which is three percentage points less than it was in the four years preceding the pandemic.

India's economy, South Asia's largest, is expected to grow by 8.3 percent in the fiscal year 2021-22, aided by an increase in public investment and incentives to boost manufacturing. In Bangladesh, continued recovery in exports and consumption will help growth rates pick up to 6.4 percent in fiscal year 2021-22. In the Maldives, GDP is projected to grow by 22.3 percent in 2021, as tourism numbers recover.

"The pandemic has had profound impacts on South Asia's economy. Going forward, much will depend on the speed of vaccination, the possible emergence of new COVID variants, as well as any major slowdown in the momentum of global growth," said Hartwig Schafer, World Bank Vice President for the South Asia Region.

"While short-term recovery is important, policymakers should also seize the opportunity to address deep-rooted challenges and pursue a development path that is green, resilient and inclusive." The pandemic is estimated to have caused 48 to 59 million people to become or remain poor in 2021 in South Asia.

Copyright Business Recorder, 2021