World Bank and ADB trim Pakistan's growth forecast to just 0.4%

 Four million more people likely to fall below the lower middle income poverty line due to low growth and high inflation

The World Bank has projected Pakistan’s economic growth to be just 0.4% this year.  More than four million people are likely to fall below the lower middle-income poverty line amid low growth and high inflation.

Meanwhile, the Asian Development Bank (ADB) has forecast Pakistan’s economic growth plunging to 0.6% from 6% last year owing to the prevailing political crisis, flood-oriented economic losses, foreign exchange challenges and tighter macroeconomic policies at home and a challenging external environment.

The World Bank in its Pakistan Development Update (PDU) 2023 has said the following. “In the absence of public transfers that cover income losses or mitigate the impact of higher prices, poverty measured at the lower middle-income poverty line ($3.65 per day 2017 PPP per capita) is projected to increase to 37.2% in FY23, pushing an additional 3.9 million people into poverty as compared to FY22. The depth and severity of poverty has also increased, reflecting the overlapping impacts of multiple shocks and households’ lack of savings to mitigate short-term impacts”.

The World Bank’s GDP growth prediction at 0.4% is down from its previous growth estimate of 2% in January. The World Bank’s Country Director for Pakistan Najy Benhassine said it was not easy to write a report about Pakistan in such a critical time when so many things were happening amid super focus on IMF programme, exchange rate volatility and floods and so on but all this highlighted usual structural issues were behind the fresh numbers.

“The resolution of Pakistan’s economic crisis requires a commitment to sustained macro-fiscal and structural reforms,” said Najy Benhassine, adding that this was needed both to unlock fresh financing and avoid a balance of payments crisis and lay the foundation for a recovery of private investor confidence and higher growth over the medium term.

The Update said the poor households had been negatively impacted by a number of developments including the effects of flooding and import restrictions on production and labour incomes in economic sectors that employ a large number of the poor, including agriculture and the textile industry.

This also included the high food inflation, which reduced the real purchasing power of all households, with particularly severe impacts on poorer households that lack savings to preserve consumption amid higher prices. Also, the households had been impacted by a potential decline in international remittances.

“Downside risks to the outlook remain very high,” Adnan Ghumman, author of the report, noted politically-driven slippages in fiscal policy in the context of upcoming elections, constraints on foreign exchange liquidity and uncertainties around external funding inflows, rising levels of public debt, growing exposure of banks to the public sector, and political instability.

He said the economic activity remained subdued in the first half of 2022-23 as agriculture was impacted by flooding and difficulties in obtaining critical inputs while Large-Scale Manufacturing (LSM) contracted by 3.7% due to policy tightening and import restrictions. As a result, rising costs and declining business and consumer confidence have impacted the services sector amid inflation in the first half of the year rising to a multi-decade high.

The World Bank argued that all estimates were strongly linked to the IMF programme that Pakistan should implement and sustain macroeconomic and structural reforms because the country faced multiple downside risks due to rising public debt levels and depleting international reserves. This would secure much-needed external refinancing and new disbursements to restore macro-stability and confidence.

The report said the slower GDP growth reflected subdued private sector activity amid deteriorating confidence, import controls, belated fiscal tightening, and the impacts of the unprecedented floods of summer 2022. Over FY23, Pakistan faced devastating floods and increasing global commodity prices following Russia’s invasion of Ukraine.

In its flagship annual Asian Development Outlook (ADO) April 2023, the Manila-based lending agency called for the earliest revival of the International Monetary Fund (IMF) programme to buttress falling foreign exchange reserves, address the balance of payment challenges and unlock foreign inflows from other sources. “The government must also identify financing sources to fill the external financing gap”.

The report said the risks to the outlook and IMF programme implementation are high, tilting to the downside because of challenges both domestic and external. “Macroeconomic conditions have deteriorated seriously in the current fiscal year, and Pakistan is at dire risk because international reserves have reached critical lows”, it said, adding the economic outlook appears weak, with substantial risks from slower global growth or any further increases in world energy and food prices caused by the ongoing Russian invasion of Ukraine.

With $15 billion flood damages in addition to economic losses of $15.2 billion requiring recovery and rehabilitation cost of $16.5 billion, the likelihood of such devastating shocks continue to rise and so do their impacts on Pakistani people and their livelihoods and on ecosystems and the economy, worsening poverty and food insecurity and risking conflict over water and other resources.

It said the high inflation, estimated at 27.5% this year and 15% next fiscal year will affect purchasing power and thus restrain domestic demand.

                                                                    Khalid Bhatti