The World Bank has sounded a red alert, declaring that Pakistan’s existing economic model is faltering, causing it to lag behind its global counterparts. The once-promising strides in poverty reduction are now on a backward slide, with the benefits of economic growth disproportionately favoring a select few.

In a Policy Vision article, World Bank Country Director Najy Benhassine highlights the imperative for immediate policy changes to rectify the developmental missteps that have hindered progress and left the nation in the throes of unpredictable and sluggish growth. The World Bank official noted that the progress made in poverty reduction is now reversing, and economic growth benefits are disproportionately favoring a narrow elite. The WB country director emphasized the urgent need for policy change to address developmental issues that have benefited only a select few and resulted in volatile and slow growth. He pointed out Pakistan’s vulnerability to climate change, stressing the need to tackle the impacts of climate shocks and natural disasters.

The official highlighted policy failures and distortions in the agri-food and energy sectors, calling for reforms. In agriculture, there is a need to undo subsidies and price restrictions that trap smallholder farmers in low-value farming and promote environmentally harmful practices. Energy sector reforms should focus on financial sustainability, increased private participation, and reducing the high costs of electricity generation through renewable sources. While acknowledging the established need for policy shifts, Benhassine anticipated opposition to reform efforts. He urged those with power and influence to seize the current crisis as an opportunity for necessary changes, emphasizing the importance of collective action for a brighter and more sustainable future.

The official advocated for improved fiscal management, addressing unsustainable debt servicing costs, and enhancing domestic revenue mobilization. Reforms should target the quality of government spending by cutting regressive subsidies and reducing losses from inefficient state-owned enterprises. Progressive taxation of property and environmentally damaging activities, along with a reduction in tax exemptions, was suggested to generate more revenue from the better-off.

To achieve improved living standards, Benhassine called for stronger and more dynamic economic growth, recommending a reduction in protectionist measures and distortions in taxation that favor non-tradable sectors. He emphasized the need for an enhanced business environment, especially for smaller firms, through the reduction of red tape and costly discretion in government dealings. Addressing macroeconomic imbalances, particularly on the fiscal side, is crucial for a stable economic environment that attracts investors.

The Country Director of the Asian Development Bank in Pakistan, Yong Ye, echoed similar sentiments, emphasizing the importance of consistent policies and uninterrupted reform momentum for addressing economic challenges and achieving effective outcomes from development assistance.

In its last update, the World Bank observed a significant deceleration in Pakistan’s economy during FY23, estimating a contraction of 0.6% in real GDP. The downturn was attributed to a combination of internal and external factors, including the aftermath of the 2022 floods, government restrictions on imports and capital flows, domestic political uncertainties, escalating global commodity prices, and a more stringent global financing environment.

The preceding fiscal year concluded with substantial pressures on domestic prices, fiscal and external accounts, exchange rates, and a decline in investor confidence. The challenging economic conditions, coupled with soaring energy and food prices, diminished incomes, and agricultural losses resulting from the 2022 floods, markedly increased poverty. The poverty headcount is projected to have risen to 39.4% in FY23, signifying an addition of 12.5 million Pakistanis falling below the poverty threshold for Lower-Middle Income Countries (US$3.65/day 2017 PPP per capita), compared to 34.2% in FY22.

The World Bank stressed the necessity for meticulous economic management and profound structural reforms to ensure macroeconomic stability and foster growth. Given the current record-high inflation, escalating electricity prices, climate shocks, and insufficient public resources for human development and climate adaptation, it emphasized the urgency of critical reforms to create fiscal space for inclusive, sustainable, and climate-resilient development.

Without a prompt fiscal adjustment and decisive implementation of comprehensive reforms, Pakistan’s economy remains susceptible to both domestic and external shocks. Based on the robust execution of the IMF Stand-By Arrangement (SBA), new external financing, and sustained fiscal restraint, real GDP growth is anticipated to recover to 1.7% in FY24 and 2.4% in FY25. Despite these projections, economic growth is expected to linger below potential in the medium term, with some enhancements in investment and exports.

The report anticipates a widening of the current account deficit in the short term due to limited easing of import restrictions facilitated by new external inflows. Additionally, a weaker currency and higher domestic energy prices are expected to sustain inflationary pressures. Although the primary deficit is projected to narrow through fiscal consolidation, the overall fiscal deficit is expected to decrease marginally, primarily due to significantly higher interest payments. The economic outlook remains highly susceptible to various downside risks, including liquidity challenges for servicing debt payments, ongoing political uncertainty, and external shocks.

To address these macroeconomic challenges, the report recommends comprehensive fiscal reforms, encompassing tax policy adjustments, rationalization of public expenditure, better management of public debt, and enhanced inter-government coordination on fiscal matters. It emphasizes the importance of deepening reform efforts to restore fiscal and debt sustainability for long-term recovery. The specific suggestions include substantial reductions in tax exemptions, broadening the tax base through higher levies on agriculture, property, and retailers, improving the quality of public expenditure by reducing distortive subsidies, enhancing the financial viability of the energy sector, increasing private participation in state-owned enterprises, and strengthening the management of public debt through institutional improvements and the development of a domestic debt market.

As the World Bank underscores the urgency for a transformative shift, the challenge lies in overcoming anticipated opposition to reforms. Benhassine urges those in positions of power to seize the current crisis as an opportunity for much-needed changes. The path forward demands a comprehensive overhaul, addressing not only economic imbalances but also climate vulnerabilities. The vision for a brighter, more prosperous, and sustainable future requires collective action and a commitment to fiscal responsibility, progressive taxation, and a business-friendly environment.