World Bank Predicts Pakistan’s GDP Growth Rate Below 3% In Next 3 Years

Pakistan’s economy is expected to grow by only 1.8 percent in the current fiscal year ending June 2024, while no poverty reduction is expected over the medium term because of weak growth and continued high inflation, says the World Bank.

According to the World Bank’s latest Pakistan Development Update: Fiscal Impact of Federal State-Owned Enterprises released on Tuesday, the lender sees Pakistan’s GDP growth to be less than 3 percent over the next three years.

Pakistan’s growth rate is expected to be 1.8 percent this fiscal year and may reach 2.3 percent in FY25, rising further to 2.7 percent in FY26. However, agricultural growth is forecasted to decline to 2.2 percent in FY26.

this subdued recovery reflects tight monetary and fiscal policy, continued import management measures aimed at preserving scarce foreign reserves, and muted economic activity amid weak confidence. The Update also highlights the high fiscal costs of federal state-owned enterprises (SOEs) and the critical reforms needed to improve their performance, efficiency, and governance, including via privatizations.

After a contraction in FY23, economic activity has strengthened over the first half of FY24 on the back of strong agricultural output. This, together with improved confidence, also supported some recovery in other sectors. But growth remains insufficient to reduce poverty, with 40 percent of Pakistanis now living below the poverty line. Macroeconomic risks remain very high amid a large debt burden and limited foreign exchange reserves.

No poverty reduction is expected over the medium term because of weak growth and continued high inflation. Poverty reduction is projected to stall in the medium term due to weak growth, low real labor incomes, and persistently high inflation. The poverty headcount rate, measured at the lower-middle-income country poverty line of US$3.65/day 2017 purchasing power parity (PPP), is expected to remain around 40 percent over FY24–26.

The lower-than-potential growth and high inflationary pressures due to continued import management measures, and potential reduction in public spending on social sectors, are expected to worsen human development outcomes. These effects will be especially compounded for poorer households with already depleted savings and reduced incomes.

Chronic inflation in the absence of substantial growth, along with policy uncertainty, could cause social discontent and have negative welfare impacts. Increased targeted transfers will play a vital role in protecting the poorest from these risks.

In the absence of major and sustained economic reforms, Pakistan is expected to continue to face foreign exchange liquidity issues due to the persistent trade deficit and limited access to external financing, especially from the private sector.

Even with the recent successful completion of the IMF-SBA40 and continued rollovers, reserves are projected to remain low, hovering around 1.3 months of total imports over FY24–26. Continued import management measures and tight monetary and fiscal policies are expected to disrupt domestic supply chains and mute aggregate consumption and investment.

Confidence and Investment Muted

In the absence of an ambitious and credible economic reform plan, confidence and investment are likely to remain muted, with real GDP projected to grow at 1.8 percent in FY24. As confidence improves with the expected implementation of a new IMF program, output growth is expected to gradually recover to an average of 2.5 percent over FY25 and FY26 but remain below potential in the medium term.

Reflecting a recovery from the 2022 floods in FY23, agricultural output is expected to grow rapidly by 3.0 percent in FY24, largely supported by a higher estimated output of major crops, particularly of cotton and rice.

The agriculture sector is expected to grow at an average rate of 2.5 percent over FY25–26. With easing import management measures and spillovers from strong agriculture performance, the industry is expected to recover, growing at 1.8 percent in FY24.

Industry Woes

Despite improved confidence, the growth of the industrial sector is projected to remain muted at an average of 2.3 percent over the medium term, mainly due to tight macroeconomic policies and continued import management measures.

With spillover from the recovery in the agriculture and industry sectors, the services sector is expected to grow marginally at 1.2 percent in FY24. As inflationary pressures ease, the growth of the services sector is expected to strengthen over the medium term to an average of 2.7 percent over FY25–26.

Growth in private consumption is projected to decline to 1.7 percent in FY24, due in part to erosion in real incomes because of high inflation and in part to administrative measures, including import management measures. As inflationary pressures dissipate, private consumption is expected to grow at an average rate of 2.3 percent over FY25–26.

Total investment is expected to further contract in FY24, reflecting policy uncertainty, tight macroeconomic policy, and the high cost of borrowing, before gradually recovering in FY25–26. Constrained by high-interest expenditures, government consumption is projected to grow marginally in FY24.

With interest expenditure declining and gradual expansion of fiscal space, government consumption is expected to see some recovery over the medium-term Consumer price inflation is projected to remain elevated at 26.0 percent in FY24.

The increase in prices is driven by domestic gas, electricity, and fuel tariff adjustments resulting in a significant increase in domestic energy prices. In view of the persistently high inflationary pressures, the SBP is expected to maintain a tight monetary policy stance in FY24. Inflation will gradually moderate in FY25–26 due to a high base effect and as global commodity prices ease.

Fiscal Deficit to Rise

The fiscal deficit is projected to increase to 8.0 percent of GDP in FY24 due to higher interest payments but to gradually decline over the medium term as interest payments decrease over time and fiscal consolidation and revenue mobilization measures take hold.

Meanwhile, the primary deficit is expected to narrow to 0.1 percent of GDP in FY24 reflecting fiscal consolidation measures, before slightly growing to 0.3 percent of GDP in FY25–26. The continuation of bold fiscal consolidation measures over the medium term is necessary to restore fiscal and debt sustainability.

Pakistan is expected to continue facing liquidity pressures over the medium term. Gross financing needs will remain sizeable throughout the projection period, because of maturing short-term domestic debt, multilateral and bilateral repayments, and Eurobond bullet maturities. With the continuation of fiscal consolidation measures, public debt as a share of GDP is projected to decline to 73.1 percent in FY24 and gradually to 72.5 percent in FY26, indicating limited solvency risks.

Pakistan has sizeable upcoming domestic and external payments in the near to medium term. With limited fiscal space and foreign reserves amounting to only US$9.1 billion at end-February 2024 (equivalent to 1.7 months of FY25 imports), any delays in the disbursement of planned external financing could pose substantial liquidity risks.

The capacity to meet the high gross and external financing needs depends heavily on achieving necessary fiscal consolidation, the materialization of expected rollovers of regional bilateral loans and deposits, and the refinancing of commercial loans.