The World Bank has issued a cautious outlook for Pakistan’s economy in the fiscal year 2023–24, projecting a modest growth rate of 1.7 per cent.
The report, titled “South Asia Development Update Towards faster, cleaner growth,” highlights the fragile economic situation in Pakistan.
Several factors have contributed to this fragility. The US dollar value of imports decreased by 26 per cent in August 2023 due to low demand and import controls, resulting in input shortages and a 15 per cent decline in industrial production by June 2023.
Additionally, the economy shrank by 0.6 per cent in the fiscal year 2022–23 due to the impact of 2022 floods, high inflation, and balance of payments challenges.
Import controls, initially aimed at reducing the trade deficit, hindered the supply of industrial materials and stifled growth.
While these controls have been removed as part of an IMF lending programme, Pakistan still faces inflationary pressures, tight fiscal policies, and extensive flood damage. Foreign exchange reserves remain low, leaving the country vulnerable to external shocks.
Pakistan is not alone in its economic struggles. Bangladesh, Pakistan, and Sri Lanka are all facing acute crises with ongoing balance-of-payments issues. These countries have begun implementing IMF-supported policies to address capital outflows and debt sustainability.
Global factors, such as rising prices due to the end of the pandemic and Russia’s invasion of Ukraine, have exacerbated the challenges faced by these nations, leading to increased current account deficits and currency depreciations. To combat this, import controls have been imposed.
In Pakistan, consumer price inflation stood at 27 per cent in August, down from a peak of 38 per cent in May, thanks to a stabilised exchange rate and a decline in food prices caused by the previous year’s floods. To address high inflation, the central bank raised its benchmark interest rate to 22 per cent in June.
Pakistan and Sri Lanka are experiencing severe financial stresses, with low foreign reserve coverage and weak asset quality in both banking and non-banking sectors. The report also highlights the need for investment reforms in several South Asian countries to encourage growth.
Restrictive import measures in Bangladesh, Pakistan, and Sri Lanka, although aimed at stabilising the external sector, have led to import shortages and economic downturns. Lowering these barriers to trade and capital flows could help boost long-term productivity.
Lastly, despite adopting debt ceilings and deficit targets, many South Asian countries have high government debt-to-GDP ratios, with Pakistan experiencing fluctuations in government spending during election years.
In summary, the World Bank’s report paints a cautious picture of Pakistan’s economic prospects, emphasising the need for sustained reforms and addressing various challenges to achieve stable and sustainable growth.