Pakistan’s economy finds itself navigating a precarious path to recovery, encumbered by towering public debt, chronic fiscal imbalances, and entrenched systemic inefficiencies. The World Bank’s most recent assessment offers a dichotomous narrative: though incremental measures to stabilize the economy are evident, formidable hurdles persist.

Rampant inflation, deepening poverty, and an energy sector teetering on instability collectively impede the nation’s growth trajectory. Achieving a durable economic resurgence necessitates transformative reforms in critical domains such as taxation, public expenditure, and energy, with a reinvigorated private sector pivotal in driving enduring progress.

The World Bank projects Pakistan’s inflation to remain stubbornly elevated, entrenched in double digits, while forecasting an anemic economic growth rate of merely 2.8% for the ongoing fiscal cycle. This lackluster pace is woefully insufficient to arrest the escalating poverty level, which now grips 40.5% of the populace.

Within its Pakistan Development Update, the World Bank underscores that while the country has sidestepped the precipice of economic calamity, the implementation of crucial yet delayed reforms remains indispensable for achieving fiscal stabilization. The report posits that the government is unlikely to meet its primary fiscal targets, particularly in curbing public debt and attaining the IMF-mandated budget surplus. Tight monetary constraints, persistently high inflation, wavering policy directives, and enduring structural roadblocks collectively stifle economic dynamism, the report elaborates.

While the IMF’s outlook offers a slightly rosier perspective—anticipating marginally improved growth and tempered inflation—the World Bank’s prognosis remains more sobering. “The message is unambiguous: Pakistan has achieved a measure of economic stabilization, but substantial macroeconomic vulnerabilities persist,” observed Mukhtarul Hasan, the report’s principal author. He emphasized that the prevailing rate of economic expansion is grossly inadequate to mitigate the entrenched poverty levels, which have surged to 40.5%.

The analysis projects a meager growth rate of 2.8% for the current fiscal year, falling significantly short of the government’s aspirational 3.6% target. Even in the forthcoming fiscal period, the growth outlook is capped at 3.2%. According to Franziska Ohnsorge, Chief Economist for South Asia at the World Bank, the region at large is poised for robust economic performance, yet Pakistan’s prospects remain bleak, aggravated by its burgeoning population. This subdued growth trajectory will yield only incremental enhancements in income levels and living standards over the medium term.

The report further highlights that this sluggish economic momentum will be inadequate to generate sufficient employment for the estimated 3.5 million individuals anticipated to enter the workforce over the next two years. “There will be negligible progress in alleviating the entrenched poverty rate of 40.5%,” commented senior economist Tobias Haque.

By June’s conclusion, the national poverty rate had climbed to an alarming 40.5%, marginally higher than the preceding year’s 40.2%. This uptick is predominantly attributed to stagnating economic growth, relentless inflation, and diminishing labor earnings. Although official remittance inflows recorded a 10.7% increase during the last fiscal year, their real value was eroded by the rupee’s depreciation and unrelenting inflationary headwinds.

In sum, the path to sustainable recovery for Pakistan remains fraught with complexities, necessitating decisive action and robust policy interventions to steer the nation toward economic stability and social upliftment.

The World Bank projects inflation to settle at 11.1% for the current fiscal year—marginally higher than the government’s projection and noticeably above the IMF’s forecast of 9.5%. While the previous year saw a reprieve in food inflation that brought temporary relief to low-income groups, this was counterbalanced by soaring energy costs and rising core inflation, particularly in rural areas. The report suggests that as inflation moderates, further policy rate reductions might be on the horizon. However, it remained silent on whether the current exchange rate of Rs279 to the dollar reflects the rupee’s genuine value or if it might be undervalued.

Waqas Idrees, co-author of the report, pinpointed the energy sector as a critical vulnerability undermining Pakistan’s fiscal health and its broader economic revival. He emphasized that the financial burden imposed by the sector necessitates swift and decisive reforms. The report also notes that Pakistan’s current account deficit is forecasted to hold steady at 0.6% of GDP, aligning with government figures. However, it warns of potential import surges as industrial activities and investments gain momentum, barring measures to regulate them effectively.

Concerns about the fiscal deficit loom large, with the World Bank estimating it will balloon to 7.6% of GDP (Rs9.4 trillion) this fiscal year, well above the government’s target of 5.9% (Rs7.3 trillion). Additionally, the nation is unlikely to achieve its primary surplus goal of Rs1.2 trillion (1% of GDP), with the World Bank predicting a lower surplus of 0.7%. For the next fiscal year, Pakistan’s primary balance is expected to shift into a deficit of 0.2% of GDP.

The report further highlights Pakistan’s pressing financing needs, driven by maturing short-term debt, obligations to multilateral and bilateral lenders, and upcoming Eurobond repayments. Public debt, currently forecast to reach 73.8% of GDP this year, is expected to rise to 74.7% in the next fiscal year, underscoring the urgent need for fiscal consolidation to secure long-term debt sustainability.

While acknowledging the steps taken towards economic stabilization, the World Bank stresses that sustained progress hinges on the full implementation of structural reforms. These reforms include overhauling the inequitable tax system, curbing wasteful public expenditures and untargeted subsidies, minimizing state intervention in economic affairs, and dismantling barriers to trade and investment. Najy Benhassine, the World Bank’s Country Director for Pakistan, emphasized the necessity of structural reforms supported by robust political consensus and active private sector participation to mitigate risks and foster sustainable growth.

The energy sector emerges as a focal point for reform, particularly in introducing greater private sector involvement in power distribution. According to Idrees, private participation could enhance customer service, reduce transmission losses, improve operational efficiency, and attract fresh investments. However, these potential gains hinge on conducive government policies and unwavering political support.

Pakistan’s power distribution companies (DISCOs) face acute challenges, with liabilities outweighing their assets. Cities such as Peshawar, Quetta, Sukkur, and Hyderabad have DISCOs grappling with significant transmission and distribution losses, compounded by poor recovery rates for electricity bills. Last year, the sector’s total electricity costs reached Rs2.9 trillion, while revenues, even after subsidies, fell short at Rs2.6 trillion.

Although Pakistan’s economy is charting a recovery course, sustaining this momentum requires immediate and sustained action. Reducing inefficiencies in public expenditures, revamping the tax framework, and incorporating private sector expertise in key domains such as energy distribution are critical measures. Without strong political commitment and consensus, these reforms risk stagnation, leaving the economy vulnerable to further instability. Yet, with strategic policies and determined implementation, Pakistan can unlock a path toward sustainable and inclusive growth.