June 6, 2023
Banking Pakistan

Pakistan’s Economic and Debt Viability at Risk, says World Bank in Development Update

Pakistan’s economic and debt sustainability are at risk, according to the World Bank’s ‘Pakistan Development Update’ report. The flagship report has predicted nearly stagnant economic growth and an average inflation rate of 29.5% for the current fiscal year, while warning of severe dangers to the country’s economy.

Pakistan’s economic future appears to be highly uncertain, with projected economic growth of only 0.4% for this year and 2% for the next fiscal year. The average inflation rate for the current fiscal year is expected to be 29.5%, and 18.5% for the following year, suggesting that the annual inflation rate will be considerably higher, according to The Express Tribune report.

Pakistan’s economy is expected to experience a sluggish growth of only 0.4% in the current fiscal year that is scheduled to end in June 2023, as per the latest Pakistan Development Update by the World Bank. The report states that the slow growth is a result of subdued private sector activity caused by dwindling confidence levels, import controls, delayed fiscal tightening measures, and the aftermath of the catastrophic floods that occurred during the summer of 2022.

During the FY23, Pakistan was also hit by the rising global commodity prices following Russia’s invasion of Ukraine. However, the country’s inconsistent policy response, which involved monetary tightening, new subsidies, and an informal exchange rate cap, depleted foreign exchange reserves and hampered progress towards fiscal consolidation. Furthermore, increasing macro risks and tighter global liquidity conditions restricted Pakistan’s access to international capital markets.

The Government’s recent policy correction involved reducing subsidy spending, increasing energy tariffs, and allowing the exchange rate to float, leading to a sharp depreciation and alignment between the interbank and open rates. Despite these measures, foreign reserves remain dangerously low, and inflation is at an all-time high.

Private sector activity has also slowed down significantly, with decreasing consumer and investor confidence and disruptions caused by administrative import controls. Due to the sluggish economic activity, the lower middle-income poverty rate is expected to increase to 37.2% in FY23.

The World Bank has warned that Pakistan is facing serious economic and debt sustainability risks and has called for sustained macro-fiscal and structural reforms to avoid a balance of payments crisis. The bank’s latest Pakistan Development Update predicts that the country’s economy will grow by just 0.4% in the current fiscal year due to subdued private sector activity, import controls, and the impacts of summer floods.

The report notes that Pakistan’s access to international capital markets has been curtailed by rising macro risks and tighter global liquidity conditions. The outlook and progress with the IMF-EFF program also depend heavily on securing new official external financing.

The government must maintain sound macroeconomic management, including a flexible exchange rate and controlling inflation through appropriate monetary policy, to establish a base for medium-term recovery. It must also increase revenues, rationalize expenditure, and implement trade and private sector reforms to improve investment, competitiveness, and productivity.

The report highlights that for Pakistan to recover and achieve higher growth in the medium term, strong political ownership and adequate external support are necessary to rapidly implement the required reform agenda. If these measures are taken, the report predicts that output growth could gradually recover in FY24 and FY25, although it will remain below potential due to ongoing external adjustments.

Inflation is also a concern, with the average inflation rate projected to rise to 29.5 percent in FY23 due to higher energy and food prices, but the report notes that inflationary pressures may decrease as global inflation moderates. The current account deficit is projected to narrow to 2.0 percent of GDP in FY23 due to dampened imports, but is expected to widen to 2.1 and 2.2 percent of GDP in FY24-FY25 as import controls ease.

The fiscal deficit, excluding grants, is projected to narrow to 6.7 percent of GDP in FY23 and further over the medium term as fiscal consolidation takes hold. Overall, the report emphasizes the importance of sustained macro-fiscal and structural reforms to secure new financing and avoid a balance of payments crisis, which will lay the foundation for higher growth and private investor confidence in the future.

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