Pakistan’s GDP projected to recover to 1.7% in FY24: World Bank

Pakistan’s real GDP growth is projected to recover to 1.7% in FY24 and 2.4% in FY25, the World Bank said in its report ‘Pakistan Development Update: Restoring Fiscal Sustainability’ released on Tuesday.

As per the report, economic growth is expected to remain below potential over the medium term with some improvements in investment and exports.

“Without a sharp fiscal adjustment and decisive implementation of broad-based reforms, Pakistan’s economy will remain vulnerable to domestic and external shocks,” it said in a statement.

“Predicated on the robust implementation of the International Monetary Fund (IMF) Stand-By Arrangement (SBA), new external financing and continued fiscal restraint, real GDP growth is projected to recover to 1.7% in FY24 and 2.4% in FY25,” the World Bank added.

As per the report, poverty headcount in Pakistan is “estimated to have reached 39.4% in FY23, with 12.5 million more Pakistanis falling below the Lower-Middle Income Country poverty threshold (US$3.65/day 2017 PPP per capita) relative to 34.2% in FY22”

The report said Pakistan’s economy slowed sharply in FY23 with real GDP estimated to have contracted by 0.6%.

“Careful economic management and deep structural reforms will be required to ensure macroeconomic stability and growth,” Najy Benhassine, World Bank Country Director for Pakistan, was quoted as saying in the statement.

The decline in economic activity reflects cumulation of domestic and external shocks including the floods of 2022, government restrictions on imports and capital flows, domestic political uncertainty, surging world commodity prices, and tighter global financing, the World Bank said.

It highlighted that FY23 ended with significant pressure on domestic prices, fiscal and external accounts and exchange rate, and loss of investor confidence.

“The difficult economic conditions along with record high energy and food prices, lower incomes, and the loss of crops and livestock due to the 2022 floods, have significantly increased poverty,” said World Bank’s report.

As per the report, the poverty headcount in Pakistan is “estimated to have reached 39.4% in FY23, with 12.5 million more Pakistanis falling below the Lower-Middle Income Country poverty threshold (US$3.65/day 2017 PPP per capita) relative to 34.2% in FY22”.

“With inflation at record highs, rising electricity prices, severe climate shocks, and insufficient public resources to finance human development investments and climate adaptation, it is imperative that critical reforms are undertaken to build the fiscal space and public means to invest into inclusive, sustainable, and climate-resilient development.”

Fiscal deficit

As per the report, limited easing of import restrictions thanks to new external inflows will widen the current account deficit in the near term and weaker currency and higher domestic energy prices will maintain inflationary pressures.

“While the primary deficit is expected to narrow as fiscal consolidation takes hold, the overall fiscal deficit will decline only marginally due to substantially higher interest payments. The economic outlook is subject to extremely high downside risks, including liquidity challenges to service debt payments, ongoing political uncertainty, and external shocks,” the report stated.

“These macroeconomic challenges can be addressed through comprehensive fiscal reforms of tax policy, rationalization of public expenditure, better management of public debt, and stronger inter-government coordination on fiscal issues. The deepening of reform efforts to regain fiscal and debt sustainability are imperative for a longer-term recovery,” said Aroub Farooq, Economist at the World Bank, and author of the report.

Reforms

To regain stability and establish a base for medium-term recovery, the report recommends reforms to drastically reduce tax exemptions and broaden the tax base through higher taxes on agriculture, property and retailers; improve the quality of public expenditure by reducing distortive subsidies, improving the financial viability of the energy sector, and increasing private participation in state-owned enterprises; and strengthening management of public debt through better institutions and systems, and by developing a domestic debt market.

Last month, the Asian Development Bank (ADB) projected Pakistan’s gross domestic product (GDP) growth to recover modestly to 1.9% in fiscal year 2023-24 from 0.3% in FY2023, with price pressures remaining elevated.