ISLAMABAD:
According to projections made by the World Bank, Pakistan will fail to meet a primary budget surplus requirement under the International Monetary Fund (IMF) programme. It predicted that Pakistan’s GDP growth rate would be steady at 1.7% but inflation would rise to 26.5%.
Increased fiscal and debt risks to the macroeconomic framework were also highlighted in the Pakistan Development Outlook report, the flagship publication of the Washington-based lender.
According to World Bank economist Aroub Farooq, the primary budget deficit for the current fiscal year will amount to 0.4% of GDP.
Pakistan must show a primary budget surplus equal to 0.4% of GDP, or Rs421 billion, as part of its short-term $3 billion IMF accord. If the projected shortfall materialises, Pakistan’s primary budget balance (Budget surplus or deficit without interest payments) would be wrong by almost Rs850 billion.
When asked about the discrepancy between the IMF goal and the WB forecast, Adnan Ghuman, another WB economist, responded that the organisation now has far more data than it did in July, when the programme was approved.
According to him, the actual deficit in the previous fiscal year was more than the sum estimated for the IMF programme.
The report also showed that Pakistan would fail to meet the aim of a general government deficit of 6.5% of GDP, or Rs6.9 trillion. The WB stated that the overall budget deficit might hit 7.7% of the GDP or Rs8.2 trillion -a slippage of Rs1.3 trillion.
Were the margins too narrow, the report would have missed its economic growth forecast.
Even assuming efficient implementation of the IMF standby agreement and a stable political climate, Pakistan faces sluggish growth and exceptionally high macroeconomic risks under the current policy framework.
However, if “structural reforms” are not made, “confidence will remain low, growth will remain sluggish, and risks will remain exceptionally high,” the research states.
Reserves are expected to remain low, averaging less than one month of total imports over the next two fiscal years, despite the end of the IMF plan, accompanying bilateral funding inflows, and continuous rollovers.
According to Najy Benhassine, WB country director in Pakistan, the type of fiscal changes Pakistan requires for debt and fiscal sustainability will not end in March with the completion of the IMF programme. After the current short-term IMF programme ends, there is talk of a new programme, he said.
The government will be compelled to retain import curbs, slowing the economic recovery, due to the hefty amortisation payments and limited private inflows.
Interest rates will rise as a result of a weaker currency and rising domestic policy rates, the WB said.
According to Aroub, the key to short-term macroeconomic stability is a strict adherence to the IMF programme and continuing budgetary prudence.
Without more reforms, risks will remain unusually high, import bans and low trust will continue to restrain economic activity, and low investment will harm medium-term growth potential.
When asked about the timing of the release of a $350 million budget support loan, Najy replied it would be contingent on general economic conditions.
Without any help from the government’s budget, the WB paid out $2.1 billion to those in need last year, with flood relief and the Benazir Income Support Programme (BISP) accounting for between 40 and 50 percent of that total.
“We would not disburse $2.1 billion this year but hope that without budget support $1.5 billion to $1.6 billion can still be disbursed in this fiscal year,” Najy added.
He added that the additional $350 million RISE-II loan may be released, but that the World Bank first needed to reevaluate the macroeconomic situation before releasing budget support loans. To paraphrase what he said, all the earlier actions for the RISE-II loan are said to be met by Pakistan.
The lender forecast a widening of the current account deficit to 1.4% of GDP for the current fiscal year.
Inflation
The report noted that inflation will stay high at 26.5%, noting that this is only slightly lower than the previous fiscal year due to high base impact. The government and the SBP have set the inflation target at 21% for this fiscal year.
Remittances would decrease and the trade deficit would rise, both of which could cause import restrictions. Bank borrowing to fund the government deficit has resulted in a rapid expansion of the money supply, which has added to inflationary pressures.
Rising Gross Domestic Product
The World Bank predicted that Pakistan’s economic growth rate may be only 1.7%, well below the government’s aim of 3.5%. The previous PML-N government’s claimed 0.3% growth figure for the previous fiscal year was not recognised by the WB. Pakistan’s GDP shrank in the last fiscal year, the report said.
According to consensus projections, annual real GDP shrank by 0.6% in FY23, following 6.1% expansion in FY22.
Industry and service sector activity was impacted, and private investment was reduced, due to supply chain disruptions caused by import restrictions and flood damage, high gasoline and borrowing costs, political instability, and sluggish demand.
That “current economic trajectory is not sustainable without further fiscal adjustment and other reforms” was a key finding of the research. Despite a fresh IMF programme, rollovers, refinancing, and new inflows from official creditors, the foreign exchange position continues to deteriorate. As a result, economic activity is weighed down by the continuing exchange rate depreciation and inflationary pressures.
As a result, growth in investment and exports are forecast to stay stagnant, causing GDP to expand at a slower rate than it could.
Since policy reserves are low, the economy will struggle to recover from any new domestic or external shock, making the outlook extremely vulnerable.
Record levels of borrowing were a direct result of soaring budget deficits. According to the World Bank, a significant proportion of banks’ balance sheets are currently invested in government debt.
Despite this irony, government deposits make up as much as 23% of total banking sector deposits, and a treasury single account would assist save between Rs400 billion and Rs500 billion in yearly debt servicing costs.
Poverty
WB senior economist Moritz Meyer calculated that the poverty rate rose to 39.4% in the most recent fiscal year, an increase of more than 5% from the previous year, due to decreasing GDP and high inflation.
Meyer claims that actual household incomes were severely reduced as a result of the 2022 floods, which caused record high food and energy costs, decreased labour revenues, and the loss of crops and livestock.
The lender found that temporary increases in cash transfers and a one-time fuel subsidy were not enough to protect low-income and vulnerable households.
During the past fiscal year, households saw a decrease in their real incomes and purchasing power.
This is particularly true for poor and vulnerable households, which spend almost half their budgets on food, with households in the poorest 10% facing a 7-percentage point greater inflation rate than the richest 10% population.
