Pakistan needs ‘careful’ economic management to get macroeconomic stability: WB

The World Bank (WB) on Tuesday suggested Pakistan to undertake the much-needed fiscal reforms including a reduction in tax exemptions and a broadening of the tax base, terming them “critical” for economic stability and sustainable economic growth.

“Careful economic management and deep structural reforms will be required to ensure macroeconomic stability and growth,” WB Country Director for Pakistan Najy Benhassine said while launching “Pakistan Development Update (PDU): Restoring Fiscal Sustainability.”

With inflation at record highs, rising electricity prices, severe climate shocks, and insufficient public resources to finance human development investments and climate adaptation, he said.

"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."

According to the WB report, Pakistan’s economy slowed sharply in FY23 with real Gross Domestic Product (GDP) estimated to have contracted by 0.6 per cent.

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“The decline in economic activity reflects the accumulation 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.” It said.

The report stated that the previous fiscal year ended with significant pressure on domestic prices, fiscal and external accounts and exchange rate, and loss of investors’ confidence, adding the difficult economic conditions along with record high energy and food prices, lower incomes, and the loss of crops and livestock due to the 2022 floods, have significantly increased poverty.

“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,” the WB said.

Read: Pakistan’s GDP to grow at 2.0% in 2023: World Bank

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

Predicated on the robust implementation of the International Monetary Fund (IMF) Stand-By Arrangement (SBA), new external financing and continued fiscal restraint, the WB said that real GDP growth was projected to recover to 1.7 per cent in FY24 and 2.4 per cent in FY25.

Economic growth is therefore expected to remain below potential over the medium term with some improvements in investment and exports, it added.

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

“While the primary deficit is expected to narrow as fiscal consolidation takes hold, the overall fiscal deficit will decline only marginally due to substantially higher interest payments,” it said, adding the economic outlook was subject to extremely high downside risks, including liquidity challenges to service debt payments, ongoing political uncertainty, and external shocks.

“These macroeconomic challenges can be addressed through comprehensive fiscal reforms of tax policy, rationalisation of public expenditure, better management of public debt, and stronger inter-government coordination on fiscal issues. The deepening of reform efforts to regain fiscal and debt sustainability are imperative for a longer-term recovery,” said Aroub Farooq, Economist at the World Bank, and author of the report.

To regain stability and establish a base for medium-term recovery, the report recommended reforms to drastically reduce tax exemptions and broaden the tax base through higher taxes on agriculture, property and retailers; improve the quality of public expenditure by reducing distortive subsidies, improving the financial viability of the energy sector, and increasing private participation in state-owned enterprises; and strengthening management of public debt through better institutions and systems, and by developing a domestic debt market.