The Asian Development Bank (ADB), in its latest report, has warned that the economic stability achieved recently is at risk from emerging internal and external factors, especially in the absence of structural reforms.
The development agency says that policy inertia could weaken business confidence, leading to a rise in borrowing costs. This in turn would increase external finance risks. The ADB forecasts GDP growth of 3 percent in FY26, compared to the government’s target of 4.2 percent, while the IMF also expects the growth to be lower than the government’s target.
Another report by the World Bank says that poverty has increased by 7 percent over the last three years, reaching 25.3 percent in FY24. This is because lowering poverty and inequality has never been on the agenda of successive governments. The massive damage inflicted by the floods on the livelihoods of millions of people has further exacerbated the situation. The damage to crops, livestock, housing and infrastructure is likely to be larger than the floods of 2022-23.
There is a risk that food prices, in particular, will start rising rapidly once again. The latest weekly Sensitive Price Index reveals that on a year-to-year basis, prices of wheat flour, sugar, tomato and pulse moong have gone up by 18.6 percent, 29.3 percent, 90.1 percent and 15.2 percent, respectively. The rise in the overall SPI is estimated at 5 percent. There is also likely to be a fall in real per capita income in 2025-26.
The sudden suspension of the wheat support price mechanism has drastically reduced the income of small farmers. Climate change is taking its own toll in rural areas, where floods have wiped out assets in the form of livestock, in addition to crop losses. In the given circumstances, the government should direct funds and seek support to build climate-resilient infrastructure to minimise the impact of future disasters. The WB report has also warned against the alarming pace of informal urbanisation and emphasised the need for improving living and economic conditions in rural areas.
The government boasts about achieving economic stabilisation in the form of falling inflation, stable currency, primary fiscal balances, and building SBP reserves. But these are momentary and transitional gains, not a result of reform measures. It must be noted that inflation declined due to demand suppression and import restrictions, not because of an improvement in the economic conditions as a whole.
Similarly, the primary fiscal surpluses for the last two years did not stem from fiscal austerity and prudence in the form of taxation reform or reducing the size of a bloated administration. The tax-to-GDP ratio grew by imposing a higher tax burden on those already in the tax net. The imposition of a higher rate of super tax on corporations has negatively affected their operations. Exporters’ income tax in Pakistan is the highest in the region. This is impacting productivity and investment. Also, the achievement of higher SBP reserves is due to the State Bank buying dollars from the interbank market: it bought USD 8.3 billion from the market in FY25, which has helped SBP reserves rise to USD 14.5 billion. This has been done by choking imports and keeping the growth momentum low.
At the same time, higher taxation has undermined the process of capital formation. According to media reports, well known business groups are not making any new investment. One reputed company recently exited from apparel exports, a sector crucial to our economy. Another unpleasant development is that professional and skilled persons are moving overseas for a better life.
It is a grim economic scenario which calls for new efforts to kickstart the economy, generate new employment opportunities and lift people out of poverty. This is important as the latest figures show that almost half of the country’s population is facing economic insecurity. As the long-term trend of poverty is dependent on the trend in food prices, level of per capita income and unemployment, it is essential that the government should specially focus on these areas in future planning. The poverty line is defined as the cost of ensuring the intake of the minimum nutritional requirement by an individual of 2,350 calories per day. The cost of other necessities like shelter and clothing are added to the cost of food to yield the poverty line.
To lift people out of poverty and build a vibrant human capital, more investment in education, nutrition, and the environment is vital. Around 40 percent of children are stunted, 25 percent of school-going children are out of school, and 75 percent of those enrolled in primary education. New schemes should be launched to provide training and employment to 37 percent of youth between the ages of 15 and 24, who can be a national asset. We need to change our present approach to managing the economy. We cannot subsist on loans and grants for long.
We must learn to develop and depend on our own resources for long-term economic growth and stability. IMF bailouts are no answer to our problems.