Rescue workers evacuate flood-hit people from Rajanpur, Punjab
The World Bank on Thursday slashed Pakistan’s economic growth for the ongoing fiscal year to 2 percent, down from 6 percent last year, attributing it to high-base effects, flood-related damages and disruptions, a tight monetary stance, high inflation, and a less conducive global environment.
In its October 2022 development update, the global lender said it expected the economy to gradually recover to 3.2 percent in FY24, “supported by a recovery in agricultural production, reconstruction efforts, projected lower global inflationary pressures, and improved confidence from the continued implementation of macroeconomic stabilization measures.” However, it warned, flooding would likely remain a drag on the country in the medium-term due to the loss of livelihoods and human capital, disruption to crop cycles, infrastructure damage, and possible financial sector impacts.
In a statement, the World Bank said poverty in flood-hit regions would likely worsen, stressing that if “decisive relief and recovery efforts” were not undertaken, the national poverty rate might increase by 2.5-4 percent, pushing between 5.8 and 9 million people into poverty. It also warned of persistent macroeconomic risks, referring to Pakistan’s large current account deficit, high public debt, and lower demand from its traditional export markets amid subdued global growth.
“The recent floods are expected to have a substantial negative impact on Pakistan’s economy and on the poor, mostly through the disruption of agricultural production,” said Najy Benhassine, the World Bank’s Country Director for Pakistan. “The government must strike a balance in meeting extensive relief and recovery needs, while staying on track with overdue macroeconomic reforms. It will be more important than ever to carefully target relief to the poor, constrain the fiscal deficit within sustainable limits, maintain a tight monetary policy stance, ensure continued exchange rate flexibility, and make progress on critical structural reforms, especially those in the energy sector,” he added.
Stressing that Pakistan’s economic outlook and prospects for overdue adjustment had been “significantly” affected by the floods, the World Bank said agricultural output was expected to decline sharply, with losses to cotton, date, wheat, rice crops and livestock. “Cotton losses are expected to weigh on the domestic textile, wholesale, and transportation service industries,” it said, adding that consumer price inflation was expected to surge further in the ongoing fiscal, partly due to flood disruptions. Overall inflation for the ongoing fiscal, it said, was projected to hit 23 percent, but should decline to 9.5 percent next year with declining international energy prices and resolution of flood-related supply constraints.
According to the report, the recent bout of inflation has had disproportionately adverse impacts on the poor. “More specifically, the analysis shows that the poorest households, on average, experienced inflation rates that were one percentage point higher than the wealthiest households,” it said. This could be overcome, it advised, by reducing import duties on sensitive food products. “These policies could be complemented with well targeted temporary expansions of social protection programs to mitigate the impact of higher inflation on poor households. Over the medium-term, enhancing economy-wide productivity growth through reforms in the agriculture and energy sectors could further ease inflationary pressures,” it added.
The World Bank has estimated Pakistan’s current account deficit to narrow slightly to 4.3 percent of GDP in the ongoing fiscal, partly due to stronger remittance inflows. It said the CAD should shrink further next fiscal as exports recover from flood impacts.
On the fiscal deficit, the lender said it would narrow “slightly” on fiscal consolidation efforts, despite flood impacts. “In line with fiscal consolidation efforts and lower subsidy expenditures, the primary deficit (excluding grants) is forecast to narrow from 3.1 percent of GDP in FY22 to 3 percent in FY23, despite negative impacts to revenue bases and increased expenditure needs due to the floods,” it said, adding the fiscal deficit was projected to contract by one percentage point to 6.9 percent of GDP in FY23 and expected to gradually narrow over the medium-term as revenue mobilization measures take hold, particularly GST harmonization and personal income tax reform. “With rapid nominal GDP growth, public debt as a share of GDP is projected to decline gradually over the forecast period, despite continued primary deficits,” it said, adding that the macroeconomic outlook was predicated on the IMF-EFF program remaining on track.
On the floods’ impact on macroeconomic risks, the World Bank noted policy tightening had become more challenging. “The government will face challenges in implementing the planned fiscal consolidation, given the extensive relief and recovery needs,” it said, noting additional downside risks include unexpected damages from the floods; political pressures that undermine the implementation of a coherent and prudent macroeconomic policy mix; unanticipated deterioration of external conditions; and risks associated with large fiscal and external financing needs. “To manage these uncertainties, the government should adhere to sound economic management, while carefully targeting any new expenditures to the poor and maintaining progress on critical structural reforms, including in the energy sector,” it added.
“While relief measures are needed to cushion the impacts of flooding, it will be critical to ensure that these are targeted towards those most in need,” said Derek H. C. Chen, author of the World Bank report. “Pakistan has previously resorted to energy subsidies, but our analysis shows that such measures disproportionately benefit better-off households, while imposing unsustainable fiscal costs. Going forward, the priority should be to tame inflation through sound macroeconomic policies. These should be accompanied by measures to provide targeted relief to those hit hardest by rising prices, including through expanded social protection programs, and to address the distortions that discourage trade and productivity,” he added.
Also on Thursday, the World Bank issued its latest South Asia Economic Focus report, noting that the entire region was facing economic risks due to recent major global and regional shocks, including rising inflation; the impacts of the global food, fertilizer and fuel shortages; the economic crisis in Sri Lanka; and the catastrophic floods in Pakistan.