Pakistan's economy has experienced a sharp slowdown in fiscal year 2023 (FY23), with real GDP estimated to have contracted by 0.6%, according to the latest Pakistan Development Update: Restoring Fiscal Sustainability, released on Tuesday. The World Bank report attributes this decline to a combination of domestic and external shocks, including the floods of 2022, government restrictions on imports and capital flows, political uncertainty, surging world commodity prices, and tighter global financing.
The previous fiscal year saw significant pressure on domestic prices, fiscal and external accounts, and exchange rates, leading to a loss of investor confidence. These difficult economic conditions, combined with record high energy and food prices, lower incomes, and the loss of crops and livestock due to the 2022 floods, have significantly increased poverty. The poverty headcount is estimated to have risen to 39.4% in FY23, an increase of 5.2 percentage points from FY22, pushing an additional 12.5 million Pakistanis below the Lower-Middle Income Country poverty threshold.
World Bank Country Director for Pakistan, Najy Benhassine, emphasized the need for careful economic management and deep structural reforms to ensure macroeconomic stability and growth. He pointed out that with inflation at record highs and rising electricity prices coupled with severe climate shocks and insufficient public resources for human development investments and climate adaptation, it is crucial that reforms are undertaken.
Without decisive implementation of broad-based reforms and a sharp fiscal adjustment, Pakistan's economy will remain vulnerable to domestic and external shocks. However, predicated on robust implementation of the IMF Stand-By Arrangement (SBA), new external financing, and continued fiscal restraint, real GDP growth is projected to recover to 1.7% in FY24 and 2.4% in FY25. Despite this projected recovery, economic growth is expected to remain below potential over the medium term with some improvements in investment and exports.
According to the report, easing of import restrictions due to new external inflows will widen the current account deficit in the near term, while a weaker currency and higher domestic energy prices will sustain inflationary pressures. Despite an expected narrowing of the primary deficit due to fiscal consolidation, the overall fiscal deficit will decline only marginally due to substantially higher interest payments.
The report also highlights extremely high downside risks to the economic outlook, including liquidity challenges for servicing debt payments, ongoing political uncertainty, and external shocks. World Bank Economist Aroub Farooq, author of the report, suggests these macroeconomic challenges can be addressed through comprehensive fiscal reforms of tax policy, rationalization of public expenditure, better management of public debt, and stronger inter-government coordination on fiscal issues.
The report recommends reforms to reduce tax exemptions drastically and broaden the tax base through higher taxes on agriculture, property and retailers; improve public expenditure quality by reducing distortive subsidies; enhance the financial viability of the energy sector; increase private participation in state-owned enterprises; and strengthen public debt management through better institutions and systems.
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