World Bank slashes Pakistan’s GDP projection to 1.7% for ongoing year

• WB rules out the possibility of debt restructuring for Pakistan. 
• Lender warns debt burden may rise to 89.3% of GDP till FY2027.
• Estimates that there are 12.5 million people added to list of people living below poverty line.

ISLAMABAD: The World Bank (WB) has projected that Pakistan’s GDP growth will be at 1.7% in the current fiscal compared to the official target of 3.5% while inflation may climb to 26.5% as compared to the official estimates of 21.5%, The News reported on Wednesday.

The WB also estimates a higher primary deficit of negative 0.4% of GDP against the official target of positive 0.4% agreed with the IMF.

The global lender has also ruled out the possibility of debt restructuring or changing the definition to include Pakistan in the category of Highly Indebted Poor Countries (HIPC) and instead cautioned Islamabad against a rising debt burden that may rise to 89.3% of GDP till FY2027.

The global lender also highlighted that it was difficult to undertake tax reforms as the political elites who are part of the executive/cabinet, parliament, political parties, finance ministers, cabinet committees and standing committees have a strong influence over tax policy.

The bank advised Islamabad to improve taxation measures, reduce subsidies and rationalise expenditures in order to trim the fiscal deficit by Rs2.723 trillion annually. It also highlighted that the macroeconomic outlook of the country is uncertain and is dependent on the effective implementation of reforms.

“In the short-term, macroeconomic stability will depend on the continued implementation of FY24 budget and IMF-SBA agreement, coherent fiscal and monetary policy mix, market-determined exchange rate, and reduced policy and political uncertainty.

“Pakistan faces multiple downside risks including high liquidity risks and low international reserves, unstable political environment, and external shocks,” the WB added.

“Under adverse circumstances, the public and publicly guaranteed debt (PPGD) could reach up to 89.3% of GDP by FY27. Pakistan’s PPGD is extremely sensitive to an exchange rate or interest rate shocks,” the WB’s report titled “Pakistan Development Update: Restoring Fiscal Sustainability” released here during a press conference from Washington, DC, and the Bank’s office in Islamabad on Tuesday.

WB’s Country Chief Najay Benhassine said the projected dollar inflows from the bank might drop from over $2 billion in the last financial year to around $1.5 or $1.6 billion, including the possibility of a programme loan of $350 million under RISE-II during the current fiscal year.

The disbursement of loans in the last financial year was on the higher side due to the 2022 floods but the final figures are dependent on the executing agencies ability to accelerate the process of implementing the projects.

The Public Expenditure Review (PER) of the WB has estimated that the government could save Rs2.723 trillion or 4.07% of GDP by reducing regressive subsidies in the power sector, trimming operations in devolved ministries, devolving Higher Education Commission (HEC) and NCHD, reducing development spending, adopting Treasury Single Account as well as taking steps to overhaul GST, Personal Income Tax and imposing FED on cigarettes.

The bank has estimated that there are 12.5 million people added to the list of those living below the poverty line in Pakistan as the poverty line has gone up from 34.2% to 39.4% of the population in last fiscal 2022-23 owing to severe floods and record inflationary pressures. This implies that around 96 million people are living below the poverty line.

It also conducted Value Added Tax (VAT) known as General Sales Tax (GST) in Pakistan and found that concessionary tax rates, exemptions and zero rating regime for non-exported products made Pakistan lose 15% of potential revenue.

The GST collection could be doubled by jacking it up to 6.53% of GDP compared to the existing 3.3%. For salaried and non-salaried class, the personal income tax rates are higher compared to other South Asian countries.

According to the statement issued by the WB, Pakistan’s economy slowed sharply in FY23 with real GDP estimated to have contracted by 0.6%. According to the bank, the decline in economic activity reflects the cumulation 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 poverty headcount is estimated to have reached 39.4% in FY23, with 12.5 million more Pakistanis falling below the Lower-Middle Income Country poverty threshold (US$3.65/day 2017 PPP per capita) relative to 34.2% in FY22.

“Careful economic management and deep structural reforms will be required to ensure macroeconomic stability and growth,” said Najy Benhassine.

“With inflation at record highs, rising electricity prices, severe climate shocks, and insufficient public resources to finance human development investments and climate adaptation, it is imperative that critical reforms are undertaken to build the fiscal space and public means to invest into inclusive, sustainable, and climate-resilient development.”

Without a sharp fiscal adjustment and decisive implementation of broad-based reforms, Pakistan’s economy will remain vulnerable to domestic and external shocks.

According to the report, limited easing of import restrictions thanks to new external inflows will widen the current account deficit in the near term and weaker currency and higher domestic energy prices will maintain inflationary pressures.