FeaturedNationalVOLUME 19 ISSUE # 48

Challenges ahead despite recovery signs

Pakistan’s economy is facing a challenging recovery, weighed down by high public debt, fiscal deficits, and structural inefficiencies. The World Bank’s latest report paints a mixed picture, emphasizing that while the country has taken steps to stabilize its economy, significant obstacles remain.

High inflation, increasing poverty, and a vulnerable energy sector continue to hinder growth. The road to sustained recovery requires critical reforms, particularly in taxation, expenditure, and the energy sector, with the private sector playing a pivotal role in driving long-term progress.

The World Bank has projected that Pakistan will experience persistently high inflation, staying in the double digits, while the nation’s economic growth will be a modest 2.8% for the current fiscal period. This level of growth is inadequate to mitigate the increasing rate of poverty, which has escalated to 40.5%.

In its Pakistan Development Update, the World Bank emphasized that although the country has skirted the brink of an economic disaster, the success of vital reforms yet to be enacted is essential to achieving economic stabilization. The report indicates that the government will likely fall short of key fiscal objectives, particularly in reducing public debt and fulfilling the International Monetary Fund’s (IMF) stipulation of a budget surplus. Tight fiscal policies, persistently high inflation, uncertainties in policymaking, and unresolved structural impediments continue to constrain economic activity, the document asserts.

The World Bank’s macroeconomic outlook is more restrained compared to the IMF, which anticipates marginally stronger growth and slightly less inflationary pressure for Pakistan. “The message is unequivocal: while Pakistan has managed to stabilize its economy, significant macroeconomic challenges keep it vulnerable,” said Mukhtarul Hasan, the report’s lead author. He stressed that the current pace of economic growth is insufficient to alleviate the deeply entrenched poverty rate, which remains at 40.5%.

The report outlines a growth forecast of 2.8% for this fiscal year, falling short of the government’s goal of 3.6%. Even in the following year, growth is expected to reach only 3.2%. Franziska Ohnsorge, Chief Economist for South Asia at the World Bank, remarked that while the South Asian region as a whole is poised for robust growth, Pakistan’s outlook remains bleak, exacerbated by its rapidly growing population. The anticipated growth will deliver only marginal improvements in income levels and standards of living over the medium to long term.

The two-year growth trajectory is insufficient to generate adequate employment opportunities for the 3.5 million individuals expected to join the labor force over the next two years, according to senior economist Tobias Haque. “Minimal advancements will be made in reducing the currently elevated poverty rate of 40.5%,” the report concludes.

By the close of June, Pakistan’s poverty rate is believed to have surged to 40.5%, up slightly from 40.2% in the preceding year, primarily fueled by sluggish economic growth, soaring inflation, and dwindling labor income. Though remittances officially rose by 10.7% in the last fiscal year, their true value was diminished due to the depreciation of the rupee and elevated inflationary pressures.

The World Bank predicts inflation will hover around 11.1% for the current fiscal year—a rate that slightly surpasses government expectations but remains higher than the IMF’s forecast of 9.5%. While food inflation abated last year, offering some respite to low-income households, this relief was offset by high energy prices and rising core inflation, particularly in rural regions. The report indicates that further reductions in the policy interest rate could be anticipated as inflation eases. Nevertheless, the World Bank refrained from commenting on whether the current exchange rate of Rs279 to the dollar accurately reflects the rupee’s true value or if the currency is, in fact, undervalued.

According to Waqas Idrees, co-author of the report, the energy sector represents a significant threat to Pakistan’s fiscal health and its broader economic recovery. The financial strain imposed by the energy sector on the economy underscores the need for immediate reforms, he added.

The report also highlights that Pakistan’s current account deficit is projected to remain steady at 0.6% of GDP, aligning with official figures. However, it cautions that imports may rise as industrial activity and investment regain momentum, barring the implementation of controls to curb them.

Concerns over Pakistan’s fiscal deficit loom large, with the World Bank estimating it will swell to 7.6% of GDP (Rs9.4 trillion) this fiscal year—substantially exceeding the government’s estimate of 5.9% (Rs7.3 trillion). Additionally, the nation is expected to fall short of its primary surplus target of Rs1.2 trillion (1% of GDP), with the World Bank projecting a surplus of just 0.7%.

Next fiscal year, Pakistan’s primary balance is expected to shift into a deficit of 0.2% of GDP. The report cautions that the country’s gross financing needs will remain substantial due to the maturing of short-term debt, obligations to multilateral and bilateral lenders, and upcoming Eurobond maturities. Public debt, which is projected to reach 73.8% of GDP this year, is anticipated to increase further to 74.7% in the following year. The report underscores the urgency of ongoing fiscal consolidation to ensure long-term fiscal and debt sustainability.

The World Bank emphasizes that while Pakistan’s economy is moving towards recovery, maintaining this positive momentum hinges on the full execution of structural reforms. These essential reforms include rectifying an inequitable and distortionary tax system, curbing inefficient public expenditures and untargeted subsidies, reducing state interference in economic affairs, and eliminating barriers to trade and investment. Najy Benhassine, the World Bank’s Country Director for Pakistan, pointed out that structural reforms, bolstered by a strong political consensus and greater involvement of the private sector, are vital for mitigating risks and fostering more robust, private-sector-driven growth.

The energy sector, in particular, presents opportunities for reform through increased private sector participation in power distribution. According to Idrees, bringing in private players could enhance customer service, reduce transmission losses, improve management efficiency, and attract new investment. However, these benefits are contingent on favorable government policies and solid political support.

Most power distribution companies (DISCOs) in Pakistan are currently operating at a loss, with liabilities surpassing their assets. Idrees highlighted that DISCOs in cities like Peshawar, Quetta, Sukkur, and Hyderabad are especially vulnerable due to their high transmission and distribution losses, along with low recovery rates for electricity bills. Last year, the sector’s total electricity costs amounted to Rs2.9 trillion, while revenues, including subsidies, fell short at Rs2.6 trillion.

While Pakistan’s economy is on the path to recovery, maintaining this momentum demands urgent and sustained efforts in implementing structural reforms. Reducing inefficiencies in public expenditure, reforming the tax system, and involving the private sector in key areas like energy distribution are essential steps. Without strong political will and consensus, these efforts may falter, leaving Pakistan vulnerable to further economic instability. However, with the right policies in place, the country has the potential to achieve a more sustainable and inclusive growth trajectory.

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