FeaturedNationalVOLUME 18 ISSUE # 39

Pakistan’s ongoing economic challenges and the path ahead

In the midst of its journey towards economic stability and growth, Pakistan confronts a series of formidable and persistent challenges. These hurdles, if left unaddressed, contribute to the exacerbation of poverty and vulnerabilities within the social fabric. The first quarterly performance report submitted to the Asian Development Bank (ADB) sheds light on the progress made within the context of the Building Resilience with Active Country-cyclical Expenditures (BRACE) initiative. The report not only assesses financial developments but also underscores the complexities of Pakistan’s economic landscape.

Pakistan continues to grapple with five significant and enduring economic challenges, resulting in an upsurge of poverty and heightened social vulnerabilities. In its initial quarterly performance update submitted to the Asian Development Bank (ADB) regarding the $1.5 billion Building Resilience with Active Country-cyclical Expenditures (BRACE) initiative, the Ministry of Finance conveyed that there has been satisfactory financial progress within the Country Cyclical Development Expenditure Programme (CDEP) for the quarter concluding on December 31, 2022. Notably, 41.5% of the budget designated for social protection had been effectively utilized during this fiscal period. The report highlighted that current expenditures observed a notable 30% increase, reaching Rs6.061 trillion during the July-December period of FY23, in comparison to Rs4.676 trillion in the corresponding timeframe of the prior year. This rise was predominantly propelled by a substantial surge of 77% in mark-up payments, driven by heightened servicing of both domestic and foreign debt due to an elevated level of interest rates. Meanwhile, the Public Sector Development Programme (both federal and provincial) experienced a modest growth of 4.5% during the initial half of the current fiscal year.

Across the board, total expenditures exhibited a robust growth of 19.8%, reaching Rs6.382 trillion in the July-December period of FY23, as opposed to Rs5.328 trillion in the equivalent span of the preceding year. Over the same period, total revenue saw a commendable expansion of 18.8%, reaching Rs4.699 trillion in contrast to Rs3.956 trillion in the previous year’s comparable duration. This growth was primarily underpinned by a substantial 26.4% surge in non-tax collection, complemented by a 17% increase in tax collection. In an effort to bolster the business and agricultural sectors, the government has implemented measures aimed at generating employment opportunities, mitigating job losses, and ensuring food security. The comprehensive financial progress achieved within the framework of the CDEP indicates that 38.3% of the budget had been effectively utilized by December 31, 2022.

The report underscored the presence of persistent challenges that continue to cast a shadow over the national economy. Foremost among these is the issue of high fuel prices, which has been further exacerbated by significant depreciation in the exchange rate. The overarching impact of the Russian-Ukraine conflict on Pakistan’s economy remains substantial, largely attributed to the escalation of fuel prices. Given the relatively high multiplier effects of fuel prices, their escalation can trigger a reduction in economic activity across various sectors. This impact is not limited to a direct decline in petroleum product consumption; it also extends to sectors such as electricity production, industrial demand, goods transportation, travel, mining, construction, and more.

Following the concern of elevated fuel prices, the cost of edible oil emerges as a prominent factor affecting both GDP and household consumption, disproportionately impacting those with lower incomes. Due to the higher elasticity of oil prices and their associated demand shocks, the effects are more pronounced compared to commodities like wheat, particularly within economically disadvantaged households. Given Pakistan’s heavy reliance on imported palm oil (primarily from Malaysia and Indonesia), the nation remains vulnerable to any upward shocks in prices, which could subsequently undermine the dietary quality of children.

A persistent challenge is the ongoing struggle against rising poverty rates. The Russian-Ukraine conflict crisis has cast a considerable impact on poverty, potentially intensifying pressure on an already constrained fiscal environment. The aftermath of the 2022 floods, as documented in the Post-Disaster Needs Assessment Report, has sounded an alarm that the national poverty rate could witness an increase of 3.7% to 4%, driving an additional 8.4 million to 9.1 million individuals into poverty due to the devastating calamity. Any potential cash assistance initiatives or expansions of programs like the Benazir Income Support Programme could further exacerbate existing high fiscal deficits.

In addition, the challenge of record-high inflation persists. Mounting inflation, particularly in terms of food prices — marking the highest levels in Pakistan’s history — coupled with the rise in administered prices for petroleum products, electricity, and gas, along with continuous currency depreciation, collectively exert negative pressure on household consumption. This, in turn, is anticipated to contribute to heightened poverty levels, particularly in rural areas. Furthermore, Pakistan continues to grapple with the repercussions of the 2022 floods. While the global crisis stemming from the Russian-Ukraine conflict was anticipated to slow down economic growth within Pakistan, its adverse effects on poverty, food security, and deteriorating dietary quality are projected to be even more pronounced. The catastrophic floods of 2022, impacting 33 million people and 1.8 million hectares of cropland across the nation, resulting in damage to cotton and rice crops, destruction of infrastructure, and substantial harm to both public and private properties, are expected to lead to diminished economic growth, heightened poverty, increased food insecurity, and a deteriorated dietary landscape, particularly in rural regions.

In the face of these multifaceted economic challenges, Pakistan’s determination to overcome adversity remains steadfast. Through prudent policies, strategic planning, and international collaboration, the nation aims to break free from the shackles of persistent poverty, escalating inflation, and the aftermath of natural calamities. As the country navigates the intricate interplay of domestic and global dynamics, the pursuit of sustainable economic growth and social well-being continues to be a paramount objective. Through these collective efforts, Pakistan envisions a future marked by resilience, stability, and prosperity for all its citizens.