FeaturedNationalVOLUME 18 ISSUE # 21

Headwinds getting stronger

Three recent international reports highlight serious issues facing the Pakistan economy. The World Bank and the Asian Development Bank have lowered their growth forecasts for Pakistan which reflect the difficult economic environment facing the country. The government’s policy measures have helped stabilize the economy to some extent, but sustained economic growth will require a long-term strategy that addresses the country’s structural challenges and improves its competitiveness in the global economy.

It is a matter of concern for policy makers that the World Bank has sharply lowered Pakistan’s current-year growth forecast believing the country’s economic growth prospects have weakened due to tighter financial conditions and limited fiscal space. It now expects Pakistan’s economy to grow by only 0.4pc in the current year, from its October forecast of 2pc growth. The bleak forecast has been made despite an assumption that an agreement will be signed with the International Monetary Fund (IMF) for a bailout package.

The international financial institution also noted that lower economic output and high prices have led to stampedes and looting at flour distribution centres set up across the country. “Elevated global and domestic food prices are contributing to greater food insecurity for South Asia’s poor who spend a larger share of income on food,” the bank said. The prices of essential items increased to 44.49pc on a yearly basis in the week that ended on April 6. According to the Pakistan Bureau of Statistics (PBS), short-term inflation, measured by the Sensitive Price Indicator (SPI), for the week witnessed a hike of 0.92pc. During the seven days, the prices of 27 items increased, seven declined and 17 remained unchanged. A major hike was witnessed in the prices of food items — including chicken meat by 15.87pc, sugar by 13.48pc, potatoes by 5.11pc, bananas by 4.95pc, wheat flour by 3.10pc, gur (jaggery) by 2.12pc, eggs by 1.26pc, and milk by 1.24pc.

The World Bank has also lowered its 2023 regional growth forecast to 5.6pc from 6.1pc in October. “Rising interest rates and uncertainty in financial markets are putting downward pressure on the region’s economies,” the report said. Most countries have raised interest rates at a rapid pace since the war in Ukraine last year led to choking supply chains and stoked inflation globally. The World Bank forecast Sri Lanka’s economy will contract by 4.3pc this year, reflecting the lasting impact of the macro debt crisis, with future growth prospects heavily dependent on debt restructuring and structural reforms. It also lowered its forecast for India’s economic growth in the current fiscal year that started on April 1 to 6.3pc from 6.6pc as it expects higher borrowing costs to hurt consumption.

According to the Asian Development Bank, Pakistan’s economic growth is expected to slow significantly to 0.6pc in FY23 from 6pc in the previous fiscal year. In its latest report, it noted the economy struggles to recover from last year’s devastating floods, ballooning inflation, a current account deficit, and an ongoing foreign exchange crisis. “Pakistan’s economy continues to face strong headwinds while last year’s catastrophic floods have exacerbated the economic and financial challenges,” said ADB Country Director for Pakistan Yong Ye. “With a history of resilience in the face of adversity and depending on a fast return to stability twinned with robust macroeconomic and structural reforms, Pakistan can bounce back,” he observed.

According to the Asian Development Outlook (ADO) April 2023 report, Pakistan’s growth is projected to rise to 2pc in FY2024, if there is resumption of macroeconomic stability, implementation of reforms, post-flood recovery, and improving external conditions. The outlook notes that climate change poses a grave challenge to Pakistan’s economic, social, and environmental development. Pakistan has been ranked among the 10 most vulnerable nations worldwide on the Global Climate Risk Index in the past two decades.

The report states that in FY2023, industrial growth will continue to decelerate, which reflects fiscal and monetary tightening, a significant depreciation of the local currency, and higher domestic oil and electricity prices. “The fiscal deficit is projected to narrow slightly to the equivalent of 6.9pc of GDP in FY2023. If the International Monetary Fund (IMF) programme remains on track, the deficit will likely continue to shrink in the medium term as measures to mobilize more revenues—such as harmonizing general sales taxes—gain momentum,” the report added. It also said that average inflation is projected to more than double from 12.2pc in FY2022 to 27.5pc this fiscal year. According to the analysis, headline consumer inflation jumped to 25.4pc in the first 7 months of the fiscal year on higher domestic energy prices, a weaker currency, flood-related disruptions to supply, and restraint on imports caused by the balance of payment crisis. “As a net importer of oil and gas, Pakistan will continue experiencing strong inflationary pressures for the rest of FY2023,” it said.

On the other hand, the United States Institute of Peace (USIP), a US-based think tank, has warned that there is “a real danger that Pakistan could default on debt”, which might further intensify political turmoil amid already surging terrorism. It warned that amid skyrocketing inflation, political conflicts, and rising terrorism, the country is facing the risk of a default due to its massive external debt obligations. The US think tank suggested that in order to repay its debt and avoid a sovereign default, Pakistan’s earnings from exports, foreign direct investment (FDI) and remittances inflows are vital. However, inflows from the three sources are projected to stay subdued compared to the import bill as well as the mounting debt repayment pressure.

The gloomy predictions have come despite the fact that the government has implemented a number of policy measures aimed at stabilising the economy. The measures include a tight monetary policy, fiscal consolidation, and structural reforms. The steps have hurt the common people badly in the shape of skyrocketing food prices and lost jobs. It is hoped the measures will start producing fruit and the situation would improve soon.