The World Bank has projected the GDP growth rate for Pakistan at 2 percent in the fiscal year 2022-23 (FY23).
The Bank in its latest report Global Economic Prospects stated that Pakistan faces challenging economic conditions, including the repercussions of the recent flooding and continued policy and political uncertainty.
Pakistan, with low foreign exchange reserves and rising sovereign risk, saw its currency depreciate by 14 percent between June and December, and its country risk premium increased by 15 percentage points over this same period.
It further stated that as the country implements policy measures to stabilize macroeconomic conditions, inflationary pressures dissipate, and rebuilding begins following the floods, growth is expected to pick up to 3.2 percent in the fiscal year 2023-24 (FY24), still below previous projections.
The report noted that the recent floods in Pakistan are estimated to have caused damage equivalent to about 4.8 percent of GDP. Extreme weather events can exacerbate food deprivation, cut the region off from essential supplies, destroy infrastructure, and directly impede agricultural production.
Pakistan faces mounting economic difficulties and Sri Lanka remains in crisis. In all regions, improvements in living standards over the half-decade to 2024 are expected to be slower than from 2010-19, the report noted.
East Asia and Pacific (EAP) and South Asia (SAR) are the only regions where real effective exchange rates did not strengthen significantly in 2022, due to the weakening Chinese renminbi and sharp nominal currency depreciations in Pakistan and Sri Lanka, respectively. Some areas of SAR also face particularly elevated risks, as illustrated by the damage wrought by recent flooding in Pakistan.
The report further stated that floods in Pakistan have inundated one-third of the country, while droughts in South America threaten agricultural production and larger ecosystems. Such extreme events are becoming increasingly likely as global warming heightens the expected losses and damages related to climate change.
In some economies, the deterioration in economic conditions has led to a substantial rise in poverty (Afghanistan, Pakistan, and Sri Lanka). Many households are consuming less nutritious food, and rolling electricity blackouts have become common as fuel has been rationed. The combination of limited foreign exchange buffers and widening external current account deficits encouraged several countries (Bangladesh and Pakistan) to approach the International Monetary Fund (IMF) for help in bolstering foreign exchange reserves and mitigating external financing pressures. In parallel, governments have tightened fiscal policies and, in some cases, imposed import controls and food export bans.
In Pakistan, an already precarious economic situation, with low foreign exchange reserves and large fiscal and current account deficits, was exacerbated last August by severe flooding, which cost many lives. About one-third of the country’s land area was affected, damaging infrastructure, and directly affecting about 15 percent of the population. Recovery and reconstruction needs are expected to be 1.6 times the fiscal year 2022-23 national development budget. The flooding is likely to have seriously damaged agricultural production—which accounts for 23 percent of GDP and 37 percent of employment—by disrupting the current and upcoming planting seasons and pushing between 5.8 and 9 million people into poverty. Policy uncertainty further complicates the economic outlook, it added. Pakistan’s consumer price inflation reached 24.5 percent in December on an annual basis, recently coming off its highest rate since the 1970s.
Growth in SAR is projected to slow to 5.5 percent in 2023 on slowing external demand and tightening financial conditions before picking up slightly to 5.8 percent in 2024.
Growth is revised lower over the forecast horizon and is below the region’s 2000-19 average growth of 6.5 percent. This pace reflects still robust growth in India, Maldives, and Nepal offsetting the effects of the floods in Pakistan and the economic and political crises in Afghanistan and Sri Lanka. The deteriorating global environment, however, will weigh on investment in the region.
Domestic crises, global growth spillovers, and tightening financing conditions continue to buffet economies, contributing to a downgrade in growth prospects. Fixed investment is likely to be set back further by recent developments. Monetary and fiscal policy has tightened significantly in Pakistan and Sri Lanka to address domestic vulnerabilities in the former, and the ongoing economic crisis in the latter.
In the region excluding India, growth in 2023 and 2024—at 3.6 percent and 4.6 percent, respectively—is expected to underperform its average 2000-19 pre-pandemic rate. This is mainly due to weak growth in Pakistan.
Pakistan and Sri Lanka have had to tighten policies more rapidly in pursuit of macroeconomic stability. Food prices have risen rapidly in SAR, especially in Pakistan and Sri Lanka, increasing the incidence of food insecurity in the region.
Export bans on food, also increasingly prevalent, could have unintended consequences and exacerbate increases in global food prices. Afghanistan, Bangladesh, India, and Pakistan implemented export restrictions on food in 2022.
Any