ISLAMABAD-The World Bank has noted that Pakistan’s economy is expected to grow by only 2 percent in the current fiscal year amid catastrophic floods, a tight monetary stance, high inflation, and a less conducive global environment.
“The economic outlook and prospects for overdue adjustment have been significantly affected by the floods. Agricultural output is expected to decline sharply, with losses to cotton, date, wheat, rice crops and livestock. Cotton losses are expected to weigh on the domestic textile, wholesale, and transportation service industries. Public relief and recovery efforts are expected to partially offset the loss in activity. Real GDP growth is therefore expected to slow to 2.0 percent in FY23,” said the World Bank’s October 2022 Pakistan Development Update. Recovery will be gradual, with real GDP growth projected to reach 3.2 percent in fiscal year 2024.
Poverty in the hardest-hit regions will likely worsen in the context of the recent flooding. Preliminary estimates suggest that – without decisive relief and recovery efforts to help the poor – the national poverty rate may increase by 2.5 to 4 percentage points, pushing between 5.8 and 9 million people into poverty. Macroeconomic risks also remain high as Pakistan faces challenges associated with a large current account deficit, high public debt, and lower demand from its traditional export markets amid subdued global growth.
This Update also outlines potential strategies to manage the impacts of high inflation. Inflation in Pakistan is expected to reach around 23 percent in FY23, reflecting flood-related disruptions to the supply of food and other goods, higher energy prices, and difficult external conditions, including tighter global monetary conditions. The Update shows that the high inflation will disproportionately impact the poor.
In line with fiscal consolidation efforts and lower subsidy expenditures, the primary deficit (excluding grants) is forecast to narrow from 3.1 percent of GDP in FY22 to 3.0 percent in FY23, despite negative impacts to revenue bases and increased expenditure needs due to the floods. Similarly, the fiscal deficit is projected to contract by one percentage point to 6.9 percent of GDP in FY23 and expected to gradually narrow over the medium term as revenue mobilization measures take hold, particularly GST harmonization and personal income tax reform. With rapid nominal GDP growth, public debt as a share of GDP is projected to decline gradually over the forecast period, despite continued primary deficits. The macroeconomic outlook is predicated on the IMF-EFF program remaining on track.
Continued policy tightening has become more challenging on account of the floods. The government will face challenges in implementing the planned fiscal consolidation, given the extensive relief and recovery needs. Additional downside risks include unexpected damages resulting from the still-evolving flooding situation that could further reduce output and worsen economic imbalances; political pressures that undermine the implementation of a coherent and prudent macroeconomic policy mix; unanticipated deterioration of external conditions; and risks associated with large fiscal and external financing needs. To manage these uncertainties, the government should adhere to sound economic management, while carefully targeting any new expenditures to the poor and maintaining progress on critical structural reforms, including in the energy sector.
“The recent floods are expected to have a substantial negative impact on Pakistan’s economy and on the poor, mostly through the disruption of agricultural production,” said Najy Benhassine, the World Bank’s Country Director for Pakistan. “The government must strike a balance in meeting extensive relief and recovery needs, while staying on track with overdue macroeconomic reforms. It will be more important than ever to carefully target relief to the poor, constrain the fiscal deficit within sustainable limits, maintain a tight monetary policy stance, ensure continued exchange rate flexibility, and make progress on critical structural reforms, especially those in the energy sector.”
“While relief measures are needed to cushion the impacts of flooding, it will be critical to ensure that these are targeted towards those most in need,” said Derek H. C. Chen, author of the report. “Pakistan has previously resorted to energy subsidies, but our analysis shows that such measures disproportionately benefit better-off households, while imposing unsustainable fiscal costs. Going forward, the priority should be to tame inflation through sound macroeconomic policies. These should be accompanied by measures to provide targeted relief to those hit hardest by rising prices, including through expanded social protection programs, and to address the distortions that discourage trade and productivity.”