The World Bank has revised down Pakistan's GDP growth projection for the fiscal year 2023-24 (FY24) to 1.7%, from a previous estimate of 2%, according to its latest report "Pakistan Development Update: Restoring Fiscal Sustainability" released on Tuesday. The report also projects a recovery to 2.4% in FY25, predicated on the robust implementation of the IMF Stand-By Arrangement (SBA), new external financing, and continued fiscal restraint.
The World Bank warned that without a sharp fiscal adjustment and decisive implementation of broad-based reforms, Pakistan's economy will remain vulnerable to domestic and external shocks. Economic growth is expected to remain below potential over the medium term with some improvements in investment and exports.
In FY23, Pakistan's economy slowed sharply, with real GDP estimated to have contracted by 0.6%. This decline in economic activity reflects a combination of domestic and external shocks, including the floods of 2022, government restrictions on imports and capital flows, domestic political uncertainty, surging world commodity prices, and tighter global financing.
The World Bank highlighted that FY23 ended with significant pressure on domestic prices, fiscal and external accounts and exchange rate, leading to a loss of investor confidence. High energy and food prices, lower incomes, and the loss of crops and livestock due to the 2022 floods have significantly increased poverty. The report estimated that poverty headcount reached 39.4% in FY23, up from 34.2% in FY22.
"Careful economic management and deep structural reforms will be required to ensure macroeconomic stability and growth," said Najy Benhassine, World Bank Country Director for Pakistan. Aroub Farooq, Economist at the World Bank, added that comprehensive fiscal reforms of tax policy, rationalization of public expenditure, better management of public debt, and stronger inter-government coordination on fiscal issues are needed.
The report further recommends reforms to reduce tax exemptions and broaden the tax base through higher taxes on agriculture, property, and retailers. It also suggests improving the quality of public expenditure by reducing distortive subsidies, improving the financial viability of the energy sector, and increasing private participation in state-owned enterprises. Strengthening management of public debt through better institutions and systems, and developing a domestic debt market are also recommended.
In contrast to the World Bank's projections, last month the Asian Development Bank (ADB) projected Pakistan’s GDP growth to recover modestly to 1.9% in FY24 from 0.3% in FY23, with price pressures remaining elevated.
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