ISLAMABAD: Pakistan’s economy is forecasted to grow by a mere 1.8 percent in the ongoing fiscal year ending June 2024, as per the latest Pakistan Development Update by the World Bank.
According to the update, this sluggish recovery is attributed to tight monetary and fiscal policies, ongoing import management measures to conserve foreign reserves, and subdued economic activity amid low confidence.
The report underscores the significant fiscal burden posed by federal state-owned enterprises (SOEs) and emphasizes urgent reforms to enhance their efficiency, governance, and performance, including through privatization efforts.
Despite a contraction in the previous fiscal year, economic activity has shown signs of improvement in the first half of FY24, primarily driven by robust agricultural output. However, growth remains insufficient to alleviate poverty, with 40 percent of Pakistanis currently below the poverty line. Macro-economic risks persist due to substantial debt and limited foreign reserves.
Najy Benhassine, World Bank Country Director for Pakistan, stressed the necessity of implementing structural reforms to restore confidence and improve the economic outlook. These reforms include better fiscal management to address inflation, current account deficit, financial sector stability, and increased credit access for the private sector.
Sustaining medium-term recovery necessitates a prudent macroeconomic policy mix alongside reforms to enhance expenditure quality, broaden the tax base, tackle regulatory barriers hindering private sector activity, reduce state intervention in the economy, address energy sector challenges, and boost public investments to enhance human development outcomes.
The report outlines key reforms across ten areas for priority implementation to stimulate a robust, lasting, and poverty-alleviating economic growth recovery.
Sayed Murtaza Muzaffari, the lead author of the report, highlights that the current macroeconomic outlook for Pakistan foresees growth below the country’s potential, accompanied by minimal poverty reduction and a persistent decline in living standards. He underscores that various risks threaten this outlook, including uncertainties regarding policy commitments and the implementation of reforms. Moreover, financial sector risks, potential escalations in global energy and food prices amidst regional geopolitical tensions, slower global economic growth, and tighter-than-expected global financing conditions all contribute to the high-risk environment. These factors collectively pose significant challenges to Pakistan’s economic stability and growth trajectory.
However, the report also highlights the substantial fiscal burden incurred by SOEs operating in crucial sectors of the economy. These entities have consistently incurred losses since 2016, with the
government providing substantial financial assistance through subsidies, grants, loans, and guarantees, resulting in significant and escalating fiscal risks.
To mitigate fiscal risks from SOEs, the report advocates for swift progress in the government’s plans for privatization, restructuring, and divestment as outlined in the 2021 Triage plan.
Additionally, it recommends establishing new rules for guarantee issuance, managing credit risks, ensuring compliance with International Financial Reporting Standards, and developing risk monitoring mechanisms. All SOEs, including those under the SWF, should fall under the purview of the SOE Act to ensure financial transparency and robust corporate governance practices.
The Pakistan Development Update complements the South Asia Development Update, a biannual World Bank report examining economic trends and prospects in the South Asia region. The April 2024 edition, titled “Jobs for Resilience,” underscores the region’s robust growth but highlights persistent structural challenges hindering job creation and response to climate shocks. It explores pathways to sustain long-term growth, reduce climate risks, boost employment, and increase private investment.
