FeaturedNationalVOLUME 19 ISSUE # 27

Modest growth, ongoing challenges

The latest United Nations report on the world economic situation presents a cautiously optimistic outlook for global growth in 2024, amid persistent challenges such as high interest rates, debt sustainability risks, and geopolitical tensions. Pakistan, grappling with significant economic challenges, is anticipated to experience “modest economic growth,” with its Gross Domestic Product (GDP) projected to increase by 2 percent in 2024.

The mid-year World Economic Situation and Prospects report of the United Nations noted that Pakistan has entered into a $3 billion Stand-by Arrangement with the International Monetary Fund (IMF). This program is expected to help stabilize the economy, boost foreign exchange reserves, and facilitate fiscal adjustments while safeguarding essential social spending.

However, the report highlighted that tight financial conditions and fiscal and external imbalances will continue to constrain growth in South Asia in the near term. It also pointed out that geopolitical tensions, such as the ongoing war in Ukraine and conflicts in Western Asia, pose risks of sudden oil price spikes for net-oil-importing countries in the region, including India.

Most South Asian countries experienced currency depreciation pressures in the latter half of 2023. From July to October, the US dollar rose by approximately 6.5 percent against a basket of global currencies, reaching its highest level in 11 months, driven by the strong performance of the American economy and high interest rates. Consequently, during this period, the Sri Lankan rupee depreciated by 3.2 percent against the US dollar, and the Indian rupee by 1.2 percent. In 2023, after raising policy rates in 2022, most central banks in South Asia paused monetary tightening or began lowering key policy rates, with some exceptions. Notably, the State Bank of Pakistan has maintained its policy rate at a record high of 22 percent since June 2023.

In 2023, the number of people facing acute food insecurity increased in Bangladesh and Pakistan but decreased in Sri Lanka. Afghanistan remained the most affected by the food crisis in the region, with about 46 percent of its population experiencing acute food insecurity. The report also warned that worsening climate shocks pose a significant threat to development gains, particularly for the world’s Least Developed Countries (LDCs) and small island developing States (SIDS). During July and August 2023, droughts intensified across much of India, Nepal, and Bangladesh, while Pakistan experienced above-average rainfall.

Globally, the economy is now forecast to grow by 2.7 percent in 2024, up by 0.3 percentage points from the January forecast, and by 2.8 percent in 2025, an increase of 0.1 percentage points. These revisions are mainly due to better-than-expected performances in some large developed and emerging countries, notably Brazil, India, Russia, and the United States.

Shantanu Mukherjee from the UN Department of Economic and Social Affairs (DESA) presented the latest report to reporters in New York, noting that inflation has decreased from its 2023 peak. “In developed countries, tight labor markets are leading to wage increases for some parts of the population and also drawing people into the labor force, which is important,” he said. However, the outlook remains cautiously optimistic due to the persistence of high interest rates, debt sustainability risks, and ongoing geopolitical tensions.

Mukherjee mentioned that while the economic prospects for Small Island Developing States (SIDS) have been revised upward to about 3.3 percent annually, this figure is still below the pre-pandemic average, indicating that “lost ground is still not being made up.” In contrast, growth prospects for Africa and Least Developed Countries (LDCs) in general have been revised downward to about 3.3 percent in 2024. This is particularly concerning as Africa is home to approximately 430 million people living in extreme poverty and nearly 40 percent of the global undernourished population. Furthermore, two-thirds of the high-inflation countries listed in the report are in Africa.

“In 2024, over a quarter of public revenues on average in Africa are projected to go towards interest payments, about 10 percentage points more than the average in the years immediately preceding the pandemic,” Mukherjee explained. For developing countries in general, the debt situation is less severe, but there are concerns about the continued decline in investment growth. These “downsides” are exacerbated by risks such as inflation, which both reflects and exacerbates underlying economic fragility.

The report also includes a special section on critical minerals like lithium, nickel, cobalt, and copper, which are essential for the transition to clean energy. Countries possessing these resources will need smart policies and effective implementation to fully benefit from them. Historically, growth driven by the mineral sector has often been associated with environmental damage, hindered development in other sectors, poverty, conflict, and other negative outcomes collectively known as the “resource curse.”

“It is imperative for developing countries to design and implement well-targeted and timely economic, social, and environmental policies to optimize the benefits of their critical mineral endowments and avoid another cycle of the resource curse,” the report stated.

The UN report paints a mixed picture of the global economic landscape. While certain regions like the Small Island Developing States show signs of recovery, others, particularly Africa and the Least Developed Countries, face significant hurdles. The ongoing challenges of high inflation, debt burdens, and geopolitical instability require sustained attention and strategic interventions. Crucially, the report emphasizes the potential of critical minerals in driving future growth and the necessity for developing countries to adopt well-targeted policies to harness these resources effectively, ensuring sustainable development and avoiding the detrimental effects of the resource curse.

The UN underscores the mixed economic outlook for Pakistan, highlighting both the potential for modest growth and the persistent challenges the country faces. While the IMF program offers a pathway to economic stabilization, Pakistan must contend with high inflation, significant debt burdens, and geopolitical tensions that threaten its progress. To achieve sustainable development and economic resilience, Pakistan needs to implement strategic policies that address these issues while capitalizing on opportunities for growth. By focusing on comprehensive economic, social, and environmental strategies, Pakistan can work towards a more stable and prosperous future.