World Bank slashes Pakistan’s growth forecast to 4.3%

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The World Bank (WB) cut Pakistan’s economic growth rate prediction for the current fiscal year by over 1% on Wednesday, citing the outgoing government’s last-ditch energy subsidies as putting an additional load on the budget and jeopardising the IMF programme.

“Financing price cuts or subsidies could add to the fiscal budget’s burden, jeopardise the continuing IMF programme, and limit the fiscal budget’s usage for other, more productive projects,” the World Bank said ahead of the IMF-WB Annual Spring Meetings, which begin early next week.

Hans Timmer, the bank’s Chief Economist for South Asia Region, claimed these subsidies were “unsustainable and unproductive” and proposed that fair prices be paid to consumers and redistributed to impoverished households in his recent report, “South Asia Economic Focus Reshaping Norms: A New Way Forward.”

The bank pointed out that Pakistan has previously followed through on its commitment with the IMF to eliminate tax loopholes and raise fuel taxes. In February, however, the administration was forced to grant power and fuel price relief due to growing energy prices in the country and political resistance. “While these measures can assist limit domestic price swings, they also impose a direct burden or hidden obligation on the government’s budget, thereby increasing budgetary vulnerabilities in the future.”

“GDP growth is predicted to decline to 4.3 percent in FY22 (from 5.6 percent last year) and 4 percent in FY23,” according to the report.

Pakistan’s GDP growth rate was set at 5.2 percent in January, however it has since been altered. This is in the context of “monetary tightening measures that began in September 2021, strong base effects from the previous year, and ongoing high inflation eroding real private consumption growth,” according to the bank.

South Asia’s already uneven and fragile growth will be slower than expected, according to the bank, due to the effects of the Ukraine conflict and economic issues. As a result, it predicted that the region will increase by 6.6 percent in 2022 and 6.3 percent in 2023. In comparison to the January prediction, the prognosis for 2022 has been lowered by one percentage point.

South Asian countries are already dealing with rising commodity costs, supply shortages, and banking sector risks. According to WB Vice President for South Asia Hartwig Schafer, the crisis in Ukraine will exacerbate these problems by driving up inflation, widening fiscal deficits, and weakening current account balances.

One of Pakistan’s issues, according to the bank, is its massive energy subsidies, which are the highest in the area. Inflation is predicted to grow in all nations in 2022, peaking in Pakistan and Sri Lanka in double digits before easing in 2023. In 2021, rising inflation brought the real loan rate into negative levels for a brief while. However, since 2021, a succession of monetary tightening measures has reduced inflation expectations, and the real lending rate has been positive.

On the budgetary front, Pakistan’s amassed government debt during the Covid-19 pandemic may force fiscal austerity measures, which may face political opposition. The federal government’s debt has surpassed 70% of GDP.

It was stated that Pakistan had the mildest export decline in the region in 2020, with the textile sector leading the way to recovery. At the height of the epidemic in April 2020, Pakistani products exports were down 54% year on year. Since late 2020, the textile sector has led the recovery, accounting for more than 60% of total goods exports.

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