FeaturedNationalVOLUME 18 ISSUE # 47

Rising poverty rates in Pakistan

In its semi-annual regional outlook, the World Bank reports that South Asia is poised to achieve a growth rate of 5.8% this year, surpassing other developing regions worldwide. However, it has forecast that Pakistan’s real GDP growth will remain 1.7% in the fiscal year 2024 and improve to 2.4% in the fiscal year 2025.

The South Asia Development Update, titled “Toward Faster, Cleaner Growth,” underscores the need for careful economic management and sustainable strategies to navigate the challenges that lie ahead. The World Bank, in its report titled “Pakistan Development Update: Restoring Fiscal Sustainability,” has forecast that Pakistan’s real GDP growth is expected to rebound to 1.7% in the fiscal year 2024 and further improve to 2.4% in the fiscal year 2025. However, the report cautions that economic growth is likely to remain below its full potential in the medium term, despite some improvements in investment and exports. The report emphasizes the importance of implementing significant fiscal adjustments and comprehensive reforms to safeguard Pakistan’s economy from both domestic and external shocks. Without such measures, the country’s economic vulnerability could persist.

The World Bank’s projections for GDP growth are contingent on robust execution of the International Monetary Fund’s Stand-By Arrangement (SBA), securing new external financing, and maintaining fiscal discipline. The report also highlights a concerning increase in poverty rates. It estimates that in the fiscal year 2023, the poverty headcount in Pakistan reached 39.4%, with an additional 12.5 million Pakistanis falling below the poverty threshold of a Lower-Middle Income Country (US$3.65/day 2017 PPP per capita). This is a significant rise from the 34.2% recorded in the fiscal year 2022.

The report attributes the economic slowdown in the fiscal year 2023 to a combination of factors, including domestic and external shocks such as the 2022 floods, government restrictions on imports and capital flows, political uncertainties, rising global commodity prices, and tighter global financing conditions. Furthermore, it emphasizes that these challenges have led to mounting pressure on domestic prices, fiscal and external accounts, exchange rates, and investor confidence. It underscores the urgent need for critical reforms to create fiscal space and resources for inclusive, sustainable, and climate-resilient development, particularly in light of record-high inflation, escalating electricity costs, climate-related shocks, and limited public resources.

Regarding the fiscal outlook, the report predicts a narrowing of the primary deficit as fiscal consolidation efforts take effect, but the overall fiscal deficit is expected to decline only marginally due to significantly higher interest payments. The report warns of substantial downside risks, including difficulties in servicing debt payments, ongoing political uncertainties, and external shocks. To address these macroeconomic challenges, the report recommends a comprehensive set of fiscal reforms, including changes in tax policy, reduction of public expenditure, better management of public debt, and improved inter-government coordination on fiscal matters. The reforms are seen as essential for long-term recovery.

In order to restore stability and lay the foundation for medium-term recovery, the report advises measures such as reducing tax exemptions, broadening the tax base by increasing taxes on agriculture, property, and retailers, enhancing the quality of public spending by reducing distorting subsidies, improving the energy sector’s financial viability, and increasing private sector involvement in state-owned enterprises. Additionally, it calls for better management of public debt through strengthened institutions and systems and the development of a domestic debt market.

In a similar vein, the Asian Development Bank (ADB) recently projected Pakistan’s GDP growth to modestly recover to 1.9% in the fiscal year 2023-24 from the 0.3% recorded in FY2023, with persistent price pressures. The World Bank’s outlook reveals that South Asia is anticipated to achieve a growth rate of 5.8% this year, surpassing other developing regions across the globe. However, this growth, although robust, falls short of the pre-pandemic levels and is insufficient to meet the region’s development objectives.

The South Asia Development Update predicts a slight deceleration to 5.6% growth in 2024 and 2025. This moderation is expected as the initial post-pandemic rebound wanes, and factors such as monetary tightening, fiscal consolidation, and reduced global demand collectively exert downward pressure on economic activity. There are notable downside risks to these growth prospects, particularly due to the fragile fiscal positions of the region’s governments. The average government debt-to-GDP ratio in South Asian countries stood at 86% in 2022, heightening the risk of defaults, elevated borrowing costs, and a redirection of credit away from the private sector. Additionally, the region is vulnerable to a further slowdown in China’s economic growth and the increasing frequency and severity of climate change-induced natural disasters.

Martin Raiser, World Bank Vice President for South Asia, emphasizes that although South Asia is progressing steadily, most countries in the region are not growing at a pace sufficient to achieve high-income status within a generation. Urgent measures are needed to manage fiscal risks and expedite growth. These actions include boosting private sector investment and seizing opportunities arising from the global shift towards clean energy. In India, the largest economy in the region, growth is expected to remain robust at 6.3% in FY23/24. The Maldives is forecast to experience a 6.5% growth in 2023, and Nepal is expected to rebound to a 3.9% growth in FY23/24, thanks to a strong resurgence in tourism in both countries. However, several South Asian countries are grappling with the aftermath of recent currency crises. Bangladesh’s growth is projected to slow to 5.6% in FY23/24, while Pakistan’s growth is forecasted at a mere 1.7% in FY23/24, falling below the population growth rate. Sri Lanka is on a path to recovery after a severe recession, with the economy expected to grow by 1.7% in 2024 following a contraction of 3.8% in 2023.

Despite fiscal constraints, governments in the region have limited scope to capitalize fully on the global transition to clean energy. Rather than being seen as an additional burden, this transition presents an opportunity for future growth and job creation in South Asia. This can occur through increased corporate investments, reduced air pollution, and decreased reliance on fuel imports. Even with limited fiscal resources, countries can encourage firms to adopt energy-efficient technologies through market-based regulations, awareness campaigns, improved access to finance, and more reliable power grids.

South Asia’s energy output intensity is twice the global average, and the region lags in adopting advanced energy-efficient technologies. Franziska Ohnsorge, World Bank Chief Economist for South Asia, points out that improvements in energy efficiency, within the context of a swift global energy transition, offer South Asia a chance to make progress on both environmental and economic fronts.

The energy transition will also significantly impact South Asia’s labor markets, with nearly one-tenth of the region’s workforce employed in pollution-intensive occupations. These jobs are predominantly held by lower-skilled and informal workers who are more vulnerable to shifts in the labor market. While the energy transition can create new employment opportunities, it may also leave some workers stranded in declining industries. The report recommends a range of policies to safeguard these workers, including enhanced access to quality education and training, financial support, market access, mobility assistance, and strengthened social safety nets.

While South Asia has demonstrated steady progress, it remains imperative for the region’s countries to manage fiscal risks and prioritize measures that accelerate growth. As growth rates are expected to moderate, South Asian nations must seize the opportunities presented by the global shift toward clean energy. By fostering investments in energy efficiency, reducing pollution, and decreasing reliance on fuel imports, the region can achieve both environmental and economic goals. Additionally, addressing the impact of the energy transition on labor markets and safeguarding vulnerable workers is crucial. With prudent policies and strategic actions, South Asia can harness its potential for a brighter and more sustainable future.