KARACHI: The World Bank announced in its latest development update on Tuesday Pakistan’s economy is expected to grow by only 1.8 percent in the current fiscal year ending June 2024, emphasizing the need for structural reforms and warning that 40 percent of the population has slipped below the poverty line.
Pakistan’s economy has grappled with persistent financial woes in recent years, leading to a subdued economic performance marked by high inflation, dwindling foreign exchange reserves and slow growth. After concluding a short-term, $3 billion standby facility, the country now plans to pursue a new International Monetary Fund (IMF) program to stabilize its economy and address long-standing structural challenges.
According to World Bank’s latest “Pakistan Development Update: Fiscal Impact of Federal State-Owned Enterprises,” the subdued economic recovery in recent months emerges from tight monetary and fiscal policy, continued import management measures aimed at preserving scarce foreign reserves and muted economic activity amid weak confidence.
“The structural reforms needed to durably improve the economic outlook are known,” World Bank Country Director for Pakistan Najy Benhassine said in a statement. “Developing a clearly articulated reform implementation plan that is ambitious, credible and that shows quick progress is now essential to restore confidence.”
“In particular, better fiscal management will help to lower inflation, narrow the current account deficit, improve financial sector stability and increase credit to the private sector, all of which are critical for robust economic recovery,” he added.
The bank said in a statement that after a contraction in the last fiscal year, economic activity had strengthened over the first half of the current fiscal year on the back of strong agricultural output.
“But growth remains insufficient to reduce poverty, with 40 percent of Pakistanis now living below the poverty line,” it continued. “Macroeconomic risks remain very high amid a large debt burden and limited foreign exchange reserves.”
The bank noted a sustained medium-term recovery would require a prudent macroeconomic policy mix coupled with reforms to improve the quality of expenditures, broaden the tax base, address regulatory constraints to private sector activity and reduce state presence in the economy through the privatization process.
“The current macroeconomic outlook projects growth that is below Pakistan’s potential, with little poverty reduction and continued erosion of living standards,” the lead author of the bank’s report, Sayed Murtaza Muzaffari, said.
The report also highlighted the high fiscal costs of state-owned enterprises (SOEs) operating in key sectors of the economy.
It pointed out these SOEs had been consistently making losses since 2016, and the government had been providing significant financial support to them through subsidies, grants, loans and guarantees, leading to large and growing fiscal exposure.
“Direct government support to SOEs in the form of subsidies, loans and equity investments accounted for 18 percent of the federal budget deficit and 2 percent of GDP in FY22,” said Qurat Ul Ain Hadi, co-author of the report.
The World Bank recommended rapid progress with government plans for privatization, restructuring and divestment.
In addition, it called for new guarantee issuance rules, mitigating credit risks, ensuring adherence to International Financial Reporting Standards and developing risk monitoring procedures.
