World Bank projects growth slowdown

The World Bank said on Thursday that inflation in Pakistan would edge up due to expected increase in electricity prices while economic growth will slow down to 3.4% in the ongoing fiscal year.

The global lender also showed reluctance to accept last fiscal year’s 4% growth rate.

In its annual report titled “The South Asia Economic Focus”, the Washington-based lender gave a conservative assessment of Pakistan’s economy.

It also linked the achievement of projected 3.4% growth with Pakistan’s ability to revive the stalled International Monetary Fund (IMF) loan programme.

The economic growth is expected to ease in fiscal year 2021-22, however, potential delays in the IMF programme, high demand-side pressures, potential negative spillovers from the evolving situation in Afghanistan and more severe and contagious Covid-19 waves pose downside risks to the outlook, according to the lender.

The 3.4% growth rate was the second lowest in the South Asian region and was only above the 2.1% growth projected for Sri Lanka, which is also facing external sector problems.

The growth in the agriculture sector is projected to increase compared to the previous year but growth rates for industrial and services sectors are projected to slow down.

The government has set 4.8% GDP growth target for the current fiscal year.

Inflation is projected to edge up in FY22 with expected domestic energy tariff hikes and higher oil and commodity prices before moderating in the next fiscal year, it added.

The World Bank has not accepted the 3.94% GDP growth that the government claimed to have achieved in the last fiscal year, which ended in June 2021.

“GDP is estimated to have grown by 3.5% in FY20/21, an upward revision of 2.2 percentage points compared to the last forecast.”

In the footnote, the World Bank said that 3.5% was the World Bank’s estimate while the government’s preliminary growth estimate was 3.9%.

The Express Tribune sent a question to the World Bank local office, requesting it to comment whether the bank had credible information that suggested the growth was 3.5% in the last fiscal year.

“The government’s estimate of 3.9% is in the same confidence interval as the World Bank estimate,” replied the spokesperson for the World Bank local office. “To converge on growth estimates, it will be important for the government to publish quarterly GDP numbers at the provincial level.”

In May this year, The Express Tribune had reported that an attempt had been made to inflate the previous fiscal year’s growth rate by pressurising the Pakistan Bureau of Statistics (PBS).

Finance Minister Shaukat Tarin had stated last month that he would announce GDP figures for the first quarter of 2021-22 in October this year.

Various independent studies, including the one by the Pakistan Institute of Development Economics, state that Pakistan needs to grow over 7% annually for a few decades to absorb the new entrants into the market.

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The World Bank report showed that poverty rate in Pakistan in the last fiscal year stood at 37% compared to 35.7% in 2018-19. It projected that the rate would slightly go down to 35.7% in the current fiscal year, if the country achieved 3.4% economic growth.

The World Bank termed the delay in revival of the IMF loan programme a major downside risk to the 3.4% growth projection. The stalemate in the IMF programme will enhance external financing difficulties, according to the World Bank.

Other risks in the way of achieving the 3.4% economic growth rate included “exceedingly high domestic demand leading to unsustainable external pressures, more contagious Covid-19 strains requiring widespread lockdowns and worsening of regional and domestic security conditions, including those stemming from the Afghanistan situation”. All these could delay critical structural reforms, it added.

The World Bank said that the 39-month IMF Extended Fund Facility (EFF) was likely to resume in the current fiscal year but key reforms would include domestic revenue mobilisation, reduction of power sector arrears, electricity subsidy reform and higher central bank operational autonomy, all of which were expected to strengthen long-term growth.

The World Bank noted that in line with the 25-basis-point policy rate hike in September 2021, fiscal and monetary tightening were expected to resume in the current fiscal year as the government refocused on mitigating emerging external pressures and managing long-standing fiscal challenges.

The lender argued that the implementation of key structural reforms, particularly those aimed at sustaining macroeconomic stability, increasing competitiveness and improving financial viability of the energy sector were important for sustainable economic growth.

The World Bank has projected the current account deficit to widen to 1.9% of the GDP in this fiscal year as imports expand with higher economic growth and oil prices. The deficit was almost three times more than the last fiscal year in terms of size of the economy.

The exports are also expected to grow strongly after initially tapering in this fiscal year, as tariff reform measures gain traction supporting export competitiveness. In addition, the growth of official remittance inflows is expected to moderate after benefiting from a Covid-19 induced transition to formal channels in FY21.

Despite fiscal consolidation efforts, the World Bank said that budget deficit was projected to remain high at 7% of the GDP in fiscal year 2021-22. The implementation of critical revenue-enhancing reforms, particularly the general sales tax harmonisation, will support narrowing of the fiscal deficit over time.

Public debt will remain elevated in the medium-term, as will Pakistan’s exposure to debt-related shocks, according to the World Bank. The debt is projected at 90.6% of the GDP for this fiscal year -almost at the last year’s level of 90.7%, according to the World Bank.

Published in The Express Tribune, October 8^th, 2021.

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