World Bank GDP growth projection: Pakistan's economic challenges to continue
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The World Bank has revised its GDP growth projection for Pakistan in fiscal year 2023-24 (FY24) to 1.7 percent, down from its previous estimate of 2 percent. This adjustment is highlighted in the latest report titled 'Pakistan Development Update: Restoring Fiscal Sustainability.' The report emphasizes that Pakistan's economy remains susceptible to both domestic and external shocks unless there is a substantial fiscal adjustment and the effective implementation of comprehensive reforms.
The projection for real GDP growth in FY24 is contingent upon the successful implementation of the IMF Stand-By Arrangement (SBA), securing new external financing, and maintaining fiscal discipline. The anticipated growth rates are 1.7 percent in FY24 and 2.4 percent in FY25, but overall economic growth is expected to remain below its full potential in the medium term, with some improvements in investment and exports.
In FY23, Pakistan experienced a significant economic slowdown, with an estimated contraction of 0.6 percent in real GDP. The World Bank attributes this decline to a combination of factors, including domestic and external shocks such as the 2022 floods, government import and capital flow restrictions, political uncertainty, rising global commodity prices, and tighter global financing conditions. These challenges, coupled with high energy and food prices, reduced incomes, and agricultural losses due to the floods, have led to a substantial increase in poverty.
The poverty rate in FY23 is estimated to have risen to 39.4 percent, with 12.5 million more Pakistanis falling below the Lower-Middle Income Country poverty threshold compared to FY22's 34.2 percent. The World Bank's Country Director for Pakistan, Najy Benhassine, emphasizes the need for careful economic management and structural reforms to ensure macroeconomic stability and growth. Addressing issues such as high inflation, elevated electricity prices, climate-related shocks, and insufficient resources for human development and climate adaptation requires critical reforms to create fiscal space and invest in inclusive, sustainable, and climate-resilient development.
The report also predicts that easing import restrictions due to external inflows will expand the current account deficit in the short term. Additionally, a weaker currency and higher domestic energy prices are expected to maintain inflationary pressures. While the primary deficit may decrease as fiscal consolidation progresses, the overall fiscal deficit is likely to see only marginal improvement due to significantly higher interest payments.
The economic outlook is subject to substantial downside risks, including debt servicing challenges, political uncertainty, and external shocks. To address these macroeconomic challenges, the report recommends comprehensive fiscal reforms, including changes to tax policy, reduction of public expenditure distortions, improved energy sector financial viability, increased private sector involvement in state-owned enterprises, and enhanced public debt management through better institutions and domestic debt market development. These reforms are essential for achieving long-term economic recovery and stability.
