World Bank downgrades Pakistan’s GDP growth rate at 3.4% while projecting the inflation rate to rise during the current fiscal year.
The Washington-based lender also seemed hesitant to accept last fiscal year’s growth rate of 4%.
In the report titled “The South Asia Economic Focus”, the global lender reported a conservative assessment of the country’s economy.
According to the report, Pakistan’s achievement of the forecasted 3.4% growth is linked to the country’s ability to resume the stalled International Monetary Fund (IMF) loan programme.
The bank projects the economic growth to ease in the fiscal year 2021-22 but there are multiple factors that pose downside risks to the outlook. The lender lists the probability of delays in the IMF programme, potential negative spillovers from the ever-developing situation in Afghanistan, high demand-side pressures and more severe COVID-19 waves as factors contributing to the negative economic outlook.
The growth rate of 3.4% is the second-lowest in the South Asian region. Sri Lanka has the lowest growth rate at 2.1% as it faces external sector problems.
The projections show an increase in growth in the agriculture sector compared to last year while a slowdown in growth rates is projected for the industrial and services sectors.
The GDP growth target set by the government is 4.8% for the current fiscal year.
Inflation is also expected to rise in FY22 as domestic energy prices increase along with hikes in oil and other commodity prices.
It must be noted that the government claims the GDP growth for the last fiscal year to be 3.94% but the World Bank has refused to accept the figure. “GDP is estimated to have grown by 3.5% in FY20/21, an upward revision of 2.2 percentage points compared to the last forecast.” The Bank’s estimate for the GDP growth was 3.9% as mentioned in a footnote of the report.
A spokesperson for the World Bank said, “The government’s estimate of 3.9% is in the same confidence interval as the World Bank estimate. To converge on growth estimates, it will be important for the government to publish quarterly GDP numbers at the provincial level.”
Earlier last month Finance Minister Shaukat Tarin said that he will make an announcement regarding the GDP figures for the first quarter of 2021-22 in October.
A study by the Pakistan Institute of Development Economics concluded that the country requires growth of over 7% every year for a few decades in order to absorb the new entrants into the market.
The report shows that the poverty rate during the last fiscal year was at 37% in comparison to 35.7% in 2018-19. The report showed projections that if the country manages to achieve 3.4% growth then the poverty rate would go slightly down to 35.7%.
It also mentions that a stalemate in the IMF programme could contribute to external financing difficulties.
Based on the report other risks include “exceedingly high domestic demand leading to unsustainable external pressures, more contagious Covid-19 strains requiring widespread lockdowns and worsening of regional and domestic security conditions, including those stemming from the Afghanistan situation. All these could delay critical structural reforms”.
The World Bank stated that the 39-month IMF Extended Fund Facility (EFF) was likely to continue during the current fiscal year but critical reforms would be needed which include domestic revenue mobilization, reduction of power sector arrears, electricity subsidy reform and higher central bank operational autonomy, all of which are expected to promote long-term growth.
The World Bank said that further fiscal and monetary tightening are expected to continue during the rest of the year as the government focuses on mitigating emerging external pressures and managing long-standing fiscal challenges.
The lender stated that structural reforms aiming at sustaining macroeconomic stability, increasing competitiveness and improving the financial viability of the energy sector are critical for sustainable economic growth.
The World Bank has forecasted an increase in the current account deficit to 1.9% of the GDP in this fiscal year due to increasing imports along with rising oil prices.
The exports are projected to grow significantly as tariff reform measures gain traction promoting export competitiveness. Furthermore, the increase in official remittance inflows is expected to moderate after benefiting from a Covid-19 induced transition to formal channels in FY21.
World Bank said that the budget deficit was forecasted to remain high at 7%. The implementation of critical revenue-enhancing reforms, particularly the general sales tax harmonization, will contribute to reducing the fiscal deficit over time.
Public debt will remain high in the medium-term, as will the country’s exposure to debt-related shocks, as per the World Bank. The debt is forecasted at 90.6% of the GDP for this fiscal year -similar to the previous year’s level of 90.7%.