WB expects economic activity in Pakistan to ‘remain subdued’, projects GDP growth at 1.8pc in FY24 – Business

The World Bank on Tuesday said that it expected economic activity in the country to “remain subdued”, adding that the GDP was expected to grow at 1.8 per cent in the current fiscal year.

“Pakistan is expected to continue facing foreign exchange liquidity issues due to the persistent trade deficit and limited access to external financing,” said the World Bank’s latest report titled “Pakistan Development Update: Fiscal Impact of Federal State-Owned Enterprises”.

“Even with the recent successful completion of the International Monetary Fund (IMF)’s Stand-By Arrangement (SBA) and continued rollovers, reserves are projected to remain low,” it said.

The Bank warned that import management measures were expected to continue disturbing domestic supply chain, in addition to tight macroeconomic policies subduing the aggregate consumption and investment.

“In the absence of a credible and ambitious economic reform agenda,uncertainty is expected to linger, affecting confidence and growth,” it said.

“Economic activity is therefore expected to remain subdued with real GDP projected to grow at 1.8pc in fiscal year (FY) 2024,” it added.

The bank estimated output growth to recover at an average of 2.5pc over the next two years as confidence improved “remaining below potential in the medium term”.

Furthermore, the report said, “Inflation is projected to remain elevated at 26pc in FY24 due to higher domestic energy prices. With high base effects and lower projected global commodity prices, inflation is expected to moderate over the medium term.”

With regards to the current account deficit (CAD), the report said that due to lower domestic demand and continued import management measures, it was expected to remain low at 0.7pc of the GDP in the current fiscal year, adding expectations of it narrowing to 0.6pc of GDP in the next two years.

The report pointed out that multiple factors posed risks to the the country’s economic outlook, adding that Pakistan engaged in heavy domestic borrowing for fiscal financing, with a tax-to-GDP ratio of 10pc to the GDP, leading to exposure of the banking sector to risks.

“Additional downside risks include growing policy uncertainties that could lead to weaker than expected business confidence, even more limited external financing, and therefore more pronounced macroeconomic vulnerabilities,” it elaborated.

Regarding reforms for the state-owned enterprises, the Bank said that “urgent” reforms were necessary to reduce the growing fiscal risks. It said that the entities were consistently making losses since 2016, and the government was providing “significant financial support through subsidies, grants, loans, and guarantees” which led to fiscal exposure.

The report also stated that the country had “moved away from the brink of an economic crisis” following the last minute IMF programme Pakistan had managed to clinch in July 2023.

“Steadfast implementation of the programme — including through continued fiscal restraint, energy tariff adjustments, and the continued high policy rate — enabled new official external inflows early in the fiscal year, allowing a loosening of import management measures and some recovery in confidence,” it said.

However, the report cautioned that the nascent recovery had been inadequate in addressing poverty in the country as wages for unskilled labour were not at par with inflation.

It estimated that poverty in the country had increased by 4.5 percentage points with ten million people at the risk of falling below the poverty line “in face of shocks”.

Subsequently, it noted that rising food prices continued to negatively impact the poor households “that spend half their budgets on food, leading to significant inflation inequality across households.”

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