Political instability, policy reform exacerbating economic distress in Pakistan

INTERNATIONAL DESK: Political instability and policy reform slippages are exacerbating the economic distress that Pakistan has been facing in the last few years according to a World Bank report.

The World Bank in its biannual report, “Pakistan Development Update”, noted that long-standing structural challenges pose risks to the country’s sustained growth whereas domestic political uncertainty and policy reform slippages can lead to protracted macroeconomic imbalances, Business Recorder reported.

Tighter global financing conditions, potential further increases in world energy and food prices due to the Ukraine-Russia conflict, and slower global growth due to rising inflation pose substantial risks for Pakistan’s economic outlook, the World Bank report added.

The Bank recommended that given the current significant imbalances in the external sector and low external buffers, macroeconomic adjustment, specifically fiscal consolidation to complement ongoing monetary tightening, is urgently needed.

To achieve higher and sustained growth, critical reforms needed include those aimed at sustaining macroeconomic stability, increasing domestic revenue mobilization, supporting private sector investment, raising export competitiveness, and improving the financial viability of the energy sector, the report said.

The World bank also forecasted that the real GDP growth of Pakistan in the fiscal year 2022 is expected to moderate to 4.3 per cent on the back of recent monetary tightening, high base effects, and stronger inflation.

Economic growth is expected to slow down to 4 per cent in fiscal 2023, followed by a slight improvement to a growth of 4.3 per cent in 2024.

The fiscal deficit (excluding grants) is projected to increase to 6.3 per cent of GDP in the fiscal year 2022, while the Current Account Deficit (CAD) is expected to widen to 4.4 per cent of GDP on the back of higher spending on COVID-19 vaccine procurement, settlement of energy sector arrears, development spending, and the recently announced food and fuel price reduction packages.

Pakistan’s vulnerability to debt-related shocks will remain elevated as will the country’s external financing requirements. To meet these, Pakistan will need the continued support of its multilateral and bilateral partners and access to international capital markets. The macroeconomic outlook is predicated on the IMF-EFF program remaining on track, the report said.

The report further noted that Pakistan’s financial sector remains underdeveloped and is failing to effectively deliver on its role as an intermediary of capital.

“To mitigate immediate macroeconomic risks, the government should focus on containing the fiscal deficit at a level which ensures debt sustainability, closely coordinate fiscal and monetary policy, and retains exchange rate flexibility,” said Zehra Aslam, the lead author of the report. (ANI)