The ongoing political uncertainty in the country is a serious threat to Pakistan’s economic well-being according to the World Bank.
The World Bank’s (WB) Pakistan Development Update that was released on Tuesday highlights that sustaining the economic recovery requires addressing long-standing structural weaknesses of the economy and boosting private sector investment, exports and productivity. Macroeconomic adjustment measures, specifically fiscal consolidation to complement the ongoing monetary tightening, are urgently needed. Poverty is estimated to have declined but rising food and energy inflation have diminished the real purchasing power of households.
Pakistan’s economy enjoyed a strong recovery and grew 5.6 percent in FY21 following measures taken by the government to mitigate the adverse socio-economic impacts of the pandemic.
While economic activity maintained its momentum from July to December 2021, high demand pressures and rising global commodity prices led to double-digit inflation and a sharp rise in the import bill during this period. These developments have had an adverse impact on the rupee. Moreover, long-standing structural weaknesses of the economy, including low investment, low exports, and low productivity growth pose risks to a sustained recovery.
The report highlights that with economic recovery and improved labor market conditions, poverty — measured at the lower-middle-income class poverty line of the $3.20 Purchasing Power Parity 2011 per day — declined from 37 percent in FY20 to 34 percent in FY21. However, rising food and energy prices are expected to decrease the real purchasing power of households and disproportionally affect poor and vulnerable households that spend a bigger portion of their budget on these items.
WB Country Director for Pakistan, Najy Benhassine, said that “Pakistan’s economic recovery after the COVID-19 crisis indicates that the country has enormous potential to overcome challenging economic situations”.
“However, sustaining the economic recovery requires addressing long-standing structural weaknesses of the economy and boosting private sector investment, exports and productivity,” he added.
On the back of high base effects and recent monetary tightening, real GDP growth is expected to moderate to 4.3 and 4.0 percent in FY22 and FY23, respectively. Thereafter, economic growth is projected to slightly recover to 4.2 percent in FY24, provided that structural reforms to support fiscal sustainability and macroeconomic stability are implemented rapidly, and that global inflationary pressures dissipate.
The lead author of the report, Zehra Aslam, remarked that “to mitigate immediate macroeconomic risks, the government should focus on containing the fiscal deficit at a level which ensures debt sustainability, closely coordinate fiscal and monetary policy, and retain exchange rate flexibility”.
The special section of the report focuses on financial intermediation and how to increase financing to the real economy by addressing structural impediments impacting the demand and supply of finance, including in credit markets. These impediments include extensive government borrowing from the financial sector that crowds out the supply of credit to the private sector and deepens the sovereign-bank nexus. Intermediation is further limited by low domestic savings and underdeveloped capital markets. Overall financial inclusion remains low, but good progress has been made to enhance it through ongoing digital innovations.
Ultimately, resolving these constraints in the medium to long term requires concerted efforts by the government, regulators, and other stakeholders.
The Pakistan Development Update is a companion piece to the South Asia Economic Focus, a biannual WB report that examines economic developments and prospects in the South Asia region and analyzes the policy challenges to countries. The Spring 2022 edition, titled ‘Reshaping Norms: A New Way Forward shows that growth in South Asia’ will be slower than previously projected due to the impacts of the war in Ukraine and persistent economic challenges. The report also includes short-term and long-term policy recommendations for countries in the region to counter external shocks, while laying the foundations for green, resilient, and inclusive growth.
