WB warns of Pakistan's failing growth model

ISLAMABAD:

The World Bank said on Tuesday that Pakistan's current economic growth model does not support poverty reduction, causing income gains to stall, with poverty already at an eight-year high in 2024.

The 'Reclaiming Momentum Towards Prosperity: Pakistan's Poverty, Equity and Resilience Assessment' report by the World Bank further disclosed that the aspiring middle class, which constitutes 42.7% of the population, is "struggling to achieve full economic security".

"The aspiring middle class is facing significant non-monetary deprivations, such as limited access to safe sanitation, clean drinking water, affordable energy and housing," the World Bank said, adding that this points to "poor public service delivery in Pakistan".

A troubling fact is that 37% of Pakistan youth, aged between 15 to 24 years, are not employed or participating in education or training because of high demographic pressures and misalignment of labour demand.

"Pakistan's growth model that supported initial poverty reduction has proven insufficient to sustain progress and poverty is on the rise since 2021-22," stated the report released here by the World Bank team.

To a question about the responsibility of the World Bank and the International Monetary Fund (IMF) regarding supporting such a poor economic growth model, Tobias Haque, senior World Bank economist, said that there has not been a single economic growth model being followed by Pakistan, which is imposed either by the World Bank or the IMF.

"Pakistan's once promising poverty reduction trajectory has come to a troubling halt, reversing years of hard-fought gains", the report added.

Bolormaa Amgaabazar, the World Bank's country director in Pakistan, said that the Bank wanted to study why the poverty rate did not fall as quickly as it was the case in the past. To a question, she added that the economy was not doing great in recent years.

"Recent compounding shocks have pushed poverty rates back up to a projected 25.3% in fiscal year 2023-24, which is at the highest level in eight years," according to the report. "In just the past three years, the poverty rate has increased by 7%," it added.

The report showed two different figures of poverty in Pakistan. According to the official national poverty line, the poverty rate was 25.3%, still the highest in eight years, but the international poverty line showed that the level of poverty was staggering at 44.7%.

Christina Wieser, the World Bank's poverty expert, said that from 2001 to 2015, the poverty rate reduced on an average by 3% per annum, which slowed down to just 1% annually during 2015-18.

She added that the post 2018 multiple shocks, including deterioration in macroeconomic conditions led to slight increase in poverty in Pakistan.

The report stated that the 2022 floods caused 5.1% increase in poverty and pushed an additional 13 million people below the poverty line. It added that the 2022-23 increase in inflation due to administered increases in energy prices also rapidly reduced the purchasing power and real incomes of the households.

To a question, Christina Wieser, who is also the lead author of the report, said that it was too early to assess the impact of the recent floods but added that "the vulnerability is incredibly high especially in rural areas and in the agriculture sector".

Over the past two decades, Pakistan's economic growth has been low, volatile and consumption driven, with real GDP per capita growing only 2% annually, which is half of the regional average.

Perverse institutional incentives and elite capture limit Pakistan's expansion of its productive capacity and crowd out productive investments to equitably distribute the benefit of economic growth.

Geographical poverty

The report showed that the geographical inequalities persisted as another critical challenge with rural poverty standing at 28.2% compared to 10.9% in the urban areas. There were also startling provincial disparities with Balochistan facing 42.7% poverty compared to 25.3% national average.

Punjab has the lowest poverty rate of 16.3% among all the provinces but still houses 40% of the total poor people because of being the most populated federating unit. Poverty rate in Sindh is 24.1%, followed by 29.5% in Khyber Pakhtunkhwa.

The report also shed light on the growing income inequality in Pakistan. It said that the true magnitude of income inequality in Pakistan is difficult to determine because the wealthiest families under-report their incomes, particularly income from the rent is not properly captured.

On the consumption patterns, the wealthiest families consume more than four times the poorest households. But the World Bank said that by using the FBR's data, the true income inequality can still be assessed.

The regional disparities were also vast. Seven of the 10 poorest districts are in Balochistan. However, due to population density three of the five districts with the largest absolute numbers of poor are in Punjab. Each of these districts — Muzaffargarh, Rahim Yar Khan and Dera Ghazi Khan — have more than 1 million poor people.

Districts that lagged decades ago remain behind today, creating entrenched geographic disparities in public services, resources, and opportunities. Poverty rates range from 3.9% in Islamabad to 76.9% in Tharparkar, according to the report.

Urban population understated

The report revealed that the official number that 39% of the total population lives in urban areas is also understated. "Geospatial 'Degree of Urbanization' approach shows Pakistan is 60-80% urban vs 39% officially" stated the report.

After adding the towns, 88% of the population resides in urban areas, said Christina Wieser, the World Bank's poverty expert. Unplanned urbanisation has led to 'sterile agglomeration' - dense settlements with limited improvements in productivity or living standards, she added.

The World Bank has recommended strengthening of the foundations for sustainable growth but it requires comprehensive structural reforms that ensure macro-fiscal stability and promote private-sector-led development — essential for any policy pathway toward prosperity.

"Some of the structural challenges that we have seen in the recent years have remained persistent but some improvement is noted in recent months, said Tobias.

While shedding light on the reduction in poverty from 2001 to 2015, the World Bank said that non-agricultural income has driven poverty reduction over the past two decades, which contributed 57% in the poverty reduction over the period. The agriculture labour contributed only 18% in the poverty reduction. The social transfers contributed merely 2% in the poverty reduction.

The report said that despite their positive contribution to household welfare, remittances reach only a small segment of the population. Remittance flows are also unevenly distributed; rural and low-income households are mostly recipients of domestic remittances.

Labour market is also dominated by informal, low paying jobs with over 85% of employment informal. Urban men mostly work in low-paying wage jobs in construction, transport or trade, while rural men shift from stagnant farming to low productivity off-farm work.

Women and youth largely excluded from the labour force and female labour force participation (FLFP) is very low at 25.4%, said Wieser.

Most households remain clustered at relatively low welfare levels, creating high vulnerability to shocks. The World Bank said that historically, the design of Pakistan's fiscal system has not supported poverty and inequality reduction.

"It will be critical to protect Pakistan's hard-won poverty gains while accelerating reforms that expand jobs and opportunities — especially for women and young people," said Bolormaa Amgaabazar, World Bank Country Director for Pakistan.