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Saturday, April 13, 2024

World Bank’s Bleak Outlook for Pakistan’s Economy

The World Bank paints a bleak outlook for Pakistan's economy, projecting modest growth amidst rising poverty and inflation, emphasizing the need for urgent economic reforms and fiscal consolidation to mitigate risks and restore confidence.

With nearly 40% of Pakistan’s population slipped below the poverty line amid skyrocketing inflation, the World Bank (WB) on Tuesday projected cash-strapped nation’s economy to grow by only 1.8% in the current fiscal year ending June 2024.

According to the WB’s latest “Pakistan Development Update: Fiscal Impact of Federal State-Owned Enterprises,” the modest economic recovery in recent months is attributed to stringent monetary and fiscal policies, ongoing import control measures to safeguard limited foreign reserves, and subdued economic activity amidst low confidence levels. The report highlights the imperative for a clear and ambitious economic reform agenda to restore confidence and mitigate risks, including persistent external imbalances and a large state presence in the economy.

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The World Bank warns that Pakistan would continue to face liquidity issues in the medium term, due to trade deficit and limited access to external financing, unless authorities take “major and sustained economic reforms”. The fiscal deficit is projected to increase to 8.0% of GDP in FY24 due to higher interest payments, gradually declining over the medium term as interest payments decrease and fiscal consolidation measures take hold.

However, the primary deficit is expected to decline to 0.1% of GDP in FY24, reflecting recent fiscal consolidation measures, but grow to 0.3% of GDP in FY25–26. The report underscores the necessity of deeper fiscal consolidation over the medium term to restore fiscal and debt sustainability.

The World Bank emphasizes the need for structural reforms and warns of the risks associated with heavy domestic borrowing for fiscal financing. The report advocates for reforms to state-owned enterprises (SOEs) to reduce fiscal risks, pointing out their consistent losses since 2016 and the significant financial support provided by the government.

Urgent reforms, including privatization, restructuring, and divestment, are recommended to mitigate fiscal exposure and ensure sustainable economic growth. The bank also calls for adherence to international financial reporting standards, development of risk monitoring procedures, and new guarantee issuance rules to mitigate credit risks.