FeaturedNationalVOLUME 17 ISSUE # 52

A gloomy economic scenario

There is more and more bad news for Pakistan’s economy. The World Bank’s latest release entitled “Country Climate and Development Report (CCDR) for Pakistan” says that the country’s economic growth is likely to be affected by 15% to 20% by 2050, and investment equivalent to 10% of GDP would be required in the next 8 years.

The international lender has expressed concern over this projection and said that natural disasters pose a serious threat to Pakistan’s poverty reduction efforts and development objectives. Referring to Pakistan’s continuing political tension, the report has underlined the need for revised development policies and international support in terms of investments to combat the current situation.

According to the WB report, the recent floods have caused a loss of $30 billion to Pakistan’s economy, with eight million people rendered homeless, while in the next 30 years, 60% of Pakistan’s population will be living in cities. In view of this, the World Bank has emphasized making major cities livable and resilient to natural disasters. In this connection it has proposed reforms in five sectors, including agriculture, energy and municipal and property tax structures. The World Bank has also stressed the importance of more private investment in agri-food systems, urban amenities, management, water, housing, municipal services and urban infrastructure.

The WB report comes in the wake of the adverse impact of the Russian-Ukraine conflict, a surge in global commodity prices, creeping depreciation of the rupee and a sharp increase in inflation which has upset the budget of the average household. As things stand today, the country is faced with low growth prospects, persistent current account deficit, rising public debt and relentless inflationary pressures. Adding to Pakistan’s economic woes is the low sovereign credit rating given by Fitch.

In the opinion of experts, the Pakistani economy is trapped in a vicious cycle of stagflation, with significant risks of economic default looming on the horizon. According to the latest estimates of the World Bank, Pakistan’s economic growth is expected to range between two per cent and 3.2 per cent for financial years 2022-23 and 2023-24, which would worsen the unemployment situation in the country. The current inflation rate in the country is as high as 24 per cent, with rural areas facing an inflation rate of 26.2 per cent. In particular, the food inflation of more than 28 per cent has made the lives of a majority of the population extremely difficult amid supply chain disruptions and dwindling incomes due to floods.

The sky is as overcast on the external front. As it is, the current account deficit has been projected to be 4.6 per cent and 4.3 per cent of GDP for financial years 2022-23 and 2023-24, respectively. At the same time, the fiscal deficit is projected at around seven per cent of GDP for the financial year 2022-23. Another bugbear is the rising public debt, with domestic debt estimated at Rs 31.3 trillion and external debt at around $90 billion, accounting for about 78 per cent of the country’s GDP. Foreign currency reserves are at a low level — only $7.5 billion held by the State Bank as of October 28. On top of all this, the economy is faced with large financing needs and macroeconomic risks. But due to uncertain political and economic conditions, investment is not coming.

A silver lining in the clouds is Pakistan’s removal from the grey list of the FATF which is a positive development as it would enhance the efficiency of banking transactions and encourage FDI. Following this, it will be relatively easier now for international banks and other intermediary financial institutions to make transactions with Pakistani entities as the surveillance mechanism has been made transparent, as most of the technical deficiencies have been removed from the Pakistani financial system. Also, Pakistani banks and other financial institutions would have unhampered access to the global SWIFT systems, the worldwide communication network of banks, and other global financial institutions. Most important of all, it is easier now for the government to negotiate with multilateral and bilateral donors.

However, Pakistan’s low sovereign credit rating by Fitch is a bad signal as it has raised risks to the country’s external sector liquidity. Pakistan has recently been successful in relaunching its IMF programme, with the first tranche of $1.17 billion already received. The Asian Development Bank (ADB) has also pledged up to $2.5 billion to Pakistan, of which it has already received $1.5 billion under its Building Resilience with Active Countercyclical Expenditures (BRACE) programme. Further arrangements with the World Bank worth $2 billion are under way. But due to our low credit rating, there are roadblocks ahead with regard to Pakistan’s bilateral loan relationships and raising funds through commercial sources like banks, Eurobonds, and Sukuks etc.

But, in the ultimate analysis, Pakistan’s economy cannot be saved by taking foreign loans. Instead, we should try to raise revenue indigenously by reforming the tax system and targeting the rich non-payers. Similarly, we need to reinvigorate our agricultural and industrial sectors to raise productivity.