FeaturedNationalVOLUME 19 ISSUE # 6

Pakistan’s six significant challenges

In the face of pressing economic challenges, Pakistan stands at a critical juncture that demands immediate attention and decisive action. However, the path ahead is fraught with risks, including financial sector instability and policy lapses fueled by social tensions. With persistently high inflation, localized insecurity, and lackluster growth, posing a threat not only to the existing poor but also to more than 10 million individuals hovering just above the poverty line. Without further reforms, the risks remain elevated, hampering economic activity and hindering the nation’s growth potential.

The World Bank has highlighted six significant challenges confronting Pakistan’s economy and has introduced a series of policy notes outlining crucial shifts needed for a productive, sustainable, resilient, and healthy Pakistan. At an event jointly organized by the World Bank and the Pakistan Institute of Development Economics, Martin Raiser, the World Bank’s Regional Vice President for South Asia, emphasized the difficult situations, floods, and climate change impacting Pakistan’s economy. The policy notes, focusing on issues such as child stunting, fiscal sustainability, private sector growth, energy, learning poverty, agriculture, and climate change, result from extensive outreach and engagements conducted across the country under the banner of “Reforms for a Brighter Future – Time to Decide.”

These policy notes aim to contribute to the public policy dialogue, especially in the context of upcoming elections. Given Pakistan’s current economic crisis, exacerbated by last year’s catastrophic floods, the World Bank stresses the urgency of decisive action. The country is exposed to climate change, and a silent human capital crisis further burdens Pakistan’s development.

The World Bank believes there is a viable path out of this crisis. With federal and provincial elections on the horizon, the time has come to make critical decisions about the country’s future. Acknowledging the weariness of officials with the stop-and-go cycles of half-hearted reforms, the World Bank emphasizes the need for deep changes. The stakes are high, as Pakistan has fallen behind significantly in per capita incomes and faces education and health outcomes comparable to much poorer countries in sub-Saharan Africa.

Agricultural productivity in Pakistan has stagnated, contrasting starkly with India and China’s growth rates. Water productivity is notably lower than that of India, China, and the US, raising concerns for a country where 40% of the labor force is still engaged in agriculture. Martin Raiser underscores that Pakistan’s economy is ensnared in a low-growth trap with poor human development outcomes and increasing poverty. Insufficient public resources compound the vulnerability to climate shocks. The choice facing Pakistan is clear: maintain past patterns or take difficult yet crucial steps toward a brighter future.

The policy notes propose key actions for Pakistan, including addressing the human capital crisis, improving public spending quality, expanding the revenue base, pursuing business and trade reforms, and removing distortions affecting the agricultural and energy sectors through subsidy reform and privatization of electricity distribution companies.

The report underscores potential reforms for Pakistan’s bright future, citing a lack of investment and exports stemming from inconsistent policies, alongside an unproductive and stagnant agricultural sector. The World Bank identifies six major challenges facing Pakistan, highlighting a human capital crisis as a key issue, with underutilization of available human resources impacting productivity and growth. Additionally, 40 percent of children under five suffer from stunting.

The report reveals that Pakistan holds the world’s highest number of out-of-school children, exceeding 20 million, with 79 percent of children under 10 unable to read or understand text. Furthermore, Pakistan faces a significant fiscal deficit, reaching a 22-year high of 7.9 percent at the end of fiscal year 2022. The report notes that Pakistan’s outstanding debt has surged to a record 78 percent above the legal limit, attributing the lack of investment and exports to policy inconsistencies.

In a previous report, the World Bank observed a halt in Pakistan’s strong post-pandemic recovery in FY23, marked by economic imbalances resulting from delayed policy adjustments and various economic shocks. Pressures on domestic prices, external and fiscal balances, exchange rates, and foreign exchange reserves intensified due to global factors such as rising commodity prices, monetary tightening, catastrophic flooding, and domestic political uncertainty.

Economic contraction is estimated in FY23 after two years of robust growth, with real GDP declining by 0.6 percent. Flood damage to crops, input shortages, and supply chain disruptions impacted agriculture, affecting the livelihoods of a significant portion of the population. Import restrictions, high fuel costs, political uncertainty, and weak demand hampered industry and services, leading to reduced private investment and consumption.

The report anticipates sluggish economic growth and high downside risks, despite the approval of an IMF Stand-By Arrangement in July 2023, which unlocked external financing. Reserves are expected to remain low, necessitating import controls and constraining economic recovery. Real GDP growth projections are modest, with recovery expected in the agriculture and industrial sectors, albeit constrained by high inflation. The report suggests that broader reforms are essential for substantial improvements in private investment and exports. With growth resuming, a decline in poverty to 37.2 percent is expected in FY24.

The economic outlook and short-term macroeconomic stability hinge on the effective implementation of the Stand-By Arrangement (SBA), sustained fiscal discipline, and the inflow of external financing. However, risks loom large, with potential financial sector instability and policy lapses driven by social tensions. The persistently high inflation, localized security concerns, and tepid growth amplify the vulnerability to poverty, placing more than 10 million individuals just above the poverty line at risk of descending into poverty if conditions worsen.

In the absence of further reforms, the risks will remain exceptionally elevated, constraining economic activity through import controls and weakened confidence. Insufficient investment and sluggish exports will undermine the medium-term growth potential. A more robust recovery necessitates a comprehensive medium-term reform agenda centered on fiscal consolidation and enhanced competitiveness, requiring steadfast political commitment and ownership.

The proposed reforms encompass measures to boost revenues by broadening the tax base, closing exemptions, and tapping into increased revenue from sectors such as agriculture, retail, and property. Additionally, the agenda includes steps to rationalize fiscal expenditures, targeting wasteful and regressive subsidy spending. To restore confidence in the private sector, the reform agenda involves business regulatory reforms and restructuring state-owned enterprises. Addressing inefficiencies and reducing high costs in the energy sector is also a critical component of the proposed reforms.

In conclusion, a resilient and prosperous future for Pakistan necessitates a bold and ambitious reform agenda. The success of the Stand-By Arrangement must be complemented by sustained political commitment and ownership to navigate through the challenges ahead. The proposed reforms, ranging from broadening the tax base to rationalizing fiscal expenditures and restoring private sector confidence, outline a roadmap for comprehensive change. To unlock Pakistan’s true economic potential, it is imperative to address inefficiencies in the energy sector and create an environment conducive to investment and export growth. The time to act is now – a call echoed by the urgency of the situation and the potential for a brighter economic future with the right reforms in place.