The global economy’s trajectory toward a dismal decade of growth can have significant repercussions for Pakistan. Several factors contribute to this challenging scenario, and understanding their implications for Pakistan requires a comprehensive analysis.

A sluggish global economy often results in reduced demand for goods and services worldwide. As a consequence, Pakistan, being an export-oriented economy, may experience a decline in export opportunities. This could impact key sectors such as textiles, agriculture, and manufacturing.

Pakistan heavily relies on remittances from its diaspora working abroad. Economic downturns in major remittance-sending countries may lead to reduced income for overseas Pakistanis, resulting in lower remittance inflows. This can negatively affect the country’s balance of payments and foreign exchange reserves.

A gloomy global economic outlook often prompts investors to adopt a cautious approach. Reduced global investment sentiment can result in a decline in foreign direct investment (FDI) inflows to Pakistan. This may hamper the country’s efforts to attract capital for infrastructure development and economic growth.

If global economic conditions lead to higher interest rates, Pakistan, with its significant debt burden, may face increased challenges in servicing its external debt. This could exacerbate the country’s fiscal vulnerabilities and limit the government’s capacity for essential public spending.

Pakistan is a net importer of various commodities, including oil. If the global economy experiences a slowdown, demand for commodities may decrease, potentially leading to lower prices. While this could benefit Pakistan as an importer, it may negatively impact the revenues of countries that export these commodities to Pakistan.

Economic challenges globally could exacerbate geopolitical tensions, leading to uncertainties that may adversely affect Pakistan. For instance, shifts in alliances and trade dynamics may influence the country’s geopolitical positioning and trade relationships.

Economic downturns often contribute to social and political unrest. If Pakistan faces economic challenges due to a global downturn, it could lead to increased unemployment, poverty, and dissatisfaction among the population, potentially impacting political stability.

To mitigate these challenges, Pakistan may need to focus on diversifying its economy, strengthening domestic industries, and pursuing policies that enhance resilience to external economic shocks. Collaborative efforts with international partners and adopting prudent fiscal and monetary policies can also play a crucial role in navigating the challenges posed by a dismal global economic outlook.

The World Bank has warned that the global economy is heading towards a dismal decade of growth unless governments take swift action to boost investment and fortify policy frameworks. This prognosis stems from the decline in the global growth rate, dropping from 2.6 percent in 2023 to 2.4 percent this year, marking a 0.75 percentage point decrease from the growth rate in the 2010s.

Two major non-economic factors contribute to the global economic downturn: geopolitical fragmentation and impending elections in various Western nations. The fragmentation initiated with the Russia-Ukraine war but escalated with the ongoing conflict in Gaza and the West Bank. These conflicts have disrupted the global grain supply chain and impacted oil prices, leading to elevated food and energy prices globally, particularly affecting developing countries. It remains unclear how accelerating investment and strengthening policy frameworks at the national level could yield the envisioned benefits in this context.

Critical and evident is the need to urgently resolve these conflicts. Despite escalating human costs, the international community, especially influential nations, have limited themselves to verbal exhortations without proactive efforts to end these crises.

The second factor involves national politics, with elections in the United States, the United Kingdom, the European Union, and several European countries. The incumbents’ inclination to maintain the status quo in foreign policy, including the ongoing conflicts, has resulted in a political stalemate. The situation is further complicated by the strained relations between the two largest economies, the United States and China.

The World Bank Chief Economist contends that, without a course correction, the 2020s will be remembered as a decade of wasted opportunity. However, differences arise as Western economies grapple with high inflation, driven by increased grain and oil prices, necessitating higher subsidies and widening their debt-to-Gross Domestic Product ratios.

In the first quarter of 2023, 13 out of 27 European member states reported debt-to-GDP ratios exceeding 60 percent, including Germany at 71 percent, and six member states with ratios surpassing 100 percent. Despite these challenges, global foreign direct investment (FDI) inflows rebounded to $727 billion in the first half of 2023, albeit 30 percent below 2022 levels, with significant decreases in the second quarter.

Major recipients of FDI included the US, China, the UK, the Netherlands, Singapore, and Hong Kong, while Pakistan seeks to attract FDI to address its economic challenges, recognizing the competition with stable political and economic systems in developed countries.

In this context, it may be perceived that additional incentives are necessary to attract Foreign Direct Investment (FDI). However, we strongly advise decision-makers to ensure that these incentives undergo scrutiny by legal experts who should prioritize safeguarding the long-term interests of Pakistani consumers. This is a priority that was evidently absent during the signing of power projects between 2014-17, resulting not only in the prevalent high tariffs but also compromising the country’s ability to import fuel in times of low foreign exchange reserves. This recurring situation has led to multiple engagements with the International Monetary Fund (IMF), with the country currently undergoing its twenty-fourth program.

The United Nations’ World Economic Situation and Prospects report for 2024 present a nuanced economic outlook for Pakistan, forecasting a modest GDP growth of two percent in 2024 and a slightly improved 2.4 percent in 2025.

However, these projections are overshadowed by concerning indicators. Despite last year’s robust global economic recovery post-Covid, which contributed to worldwide GDP growth, latent risks and structural vulnerabilities persist in the global economy. Major economies in South Asia, including India, Pakistan, and Bangladesh, are categorized as lower-middle-income countries, with challenges, particularly in food security.

In 2023, both Bangladesh and Pakistan saw an increase in people facing acute food insecurity, in contrast to Sri Lanka, where the situation improved. Afghanistan remains the most adversely affected, with 46 percent of its population experiencing acute food insecurity.

Delving deeper into Pakistan’s economic landscape, the report reveals alarming statistics. The inflation rate surged to 39.18 percent in 2023, leading the State Bank of Pakistan to maintain a record-high policy rate of 22 percent since June 2023. Additionally, Pakistan witnessed a currency depreciation of over 20 percent in the same year.

Furthermore, the country grapples with substantial sovereign debt and an unsustainable debt-servicing burden. External debt constituted 36.5 percent of the country’s nominal GDP in 2023, a notable increase from the previous year. The government debt-to-GDP ratio reached 89 percent in 2022, highlighting the challenges of managing fiscal responsibilities.

Real effective exchange rates, a comprehensive measurement, declined from 88.0 in 2022 to 72 percent in 2023. This index, calculated as a weighted average of bilateral exchange rates adjusted by relative consumer prices, reflects Pakistan’s economic challenges.

In conclusion, Pakistan faces a complex situation with modest economic growth projections and challenges, including inflationary pressures, currency depreciation, and high levels of sovereign debt.