ISLAMABAD, October 3, 2023—Pakistan’s economy slowed sharply in FY23, with real GDP estimated at 0.6%. According to the latest World Bank report Pakistan Development Update: Restoring Fiscal Sustainabilityreleased today, the decline in economic activity reflects the accumulation of domestic and external shocks, including the 2022 floods, government restrictions on imports and capital flows, domestic political uncertainty, soaring global prices of raw materials and the tightening of global financing.
The previous fiscal year ended with significant pressure on domestic prices, fiscal and external accounts and the exchange rate, as well as a loss of investor confidence. Difficult economic conditions, combined with record energy and food prices, falling incomes, and loss of crops and livestock due to floods in 2022, have significantly increased poverty. It is estimated that the poverty rate has reached 39.4% in FY23, with an additional 12.5 million Pakistanis falling below the lower-middle-income country poverty line (US$3.65/day 2017 PPP per capita), compared to 34.2% in FY22.
“Prudent economic management and deep structural reforms will be necessary to ensure macroeconomic stability and growth. » said Najy Benhassine, World Bank country director for Pakistan. “Faced with record inflation, rising electricity prices, severe climate shocks and insufficient public resources to finance investments in human development and climate adaptation, it is imperative that Crucial reforms are undertaken to strengthen fiscal space and public means to invest in inclusive and sustainable projects. and climate-resilient development.
Without rigorous fiscal adjustment and decisive implementation of far-reaching reforms, Pakistan’s economy will remain vulnerable to domestic and external shocks. With robust implementation of the IMF Stand-By Arrangement (SBA), new external financing and continued fiscal restraint, real GDP growth is expected to rebound to 1.7% this fiscal year 24 and 2.4% in FY25. Economic growth is therefore expected to remain below its potential in the medium term, with some improvement in investments and exports.
According to the report, limited easing of import restrictions through new external flows will widen the current account deficit in the short term and a weaker currency and higher domestic energy prices will maintain inflationary pressures. Although the primary deficit is expected to decline as fiscal consolidation takes hold, the overall fiscal deficit will decline only marginally due to significantly higher interest payments. The economic outlook is subject to extremely high downside risks, including liquidity challenges related to debt servicing, continued political uncertainty and external shocks.
“These macroeconomic challenges can be addressed through comprehensive fiscal reforms in tax policy, rationalization of public spending, better management of public debt and stronger intergovernmental coordination on budgetary issues. Deepening reform efforts to restore public finance and debt sustainability is imperative for a longer-term recovery,” said Aroub Farooq, an economist at the World Bank and author of the report.
To regain stability and establish a basis for medium-term recovery, the report recommends reforms to significantly reduce tax exemptions and broaden the tax base through higher taxes on agriculture, real estate and retailers; improve the quality of public spending by reducing distorting subsidies, improving the financial viability of the energy sector and increasing private participation in public enterprises; and strengthening public debt management through better institutions and systems, and developing an internal debt market.
THE Pakistan’s development update is a complement to South Asia Development Update, a biannual report from the World Bank that examines economic developments and prospects in the South Asia region and analyzes the policy challenges facing countries. The October 2023 edition entitled Towards faster and cleaner growth shows that growth in South Asia is higher than any other developing country region in the world, but slower than before the pandemic and not fast enough to meet its development goals. The report also includes short- and long-term policy recommendations for countries in the region to manage fiscal risks and accelerate growth, including by boosting private sector investment and seizing opportunities created by the global energy transition.
