ISLAMABAD: Pakistan’s economy recorded a strong recovery and grew by 5.6% in FY21 after the government took steps to mitigate the adverse socio-economic impact of the COVID-19 pandemic.
While economic activity maintained its momentum in the July-December 2021 period, high demand pressures and rising global commodity prices led to double-digit inflation during the period, according to the World Bank’s Development Update in Pakistan, released today. and import bills have risen sharply. These developments have adversely affected the rupee. In addition, the economy’s long-standing structural weaknesses, including low investment, low exports and low productivity growth, pose risks to a sustained recovery.
The report highlights that with economic recovery and improved labour market conditions, poverty—measured at the lower-middle-income class poverty line of $3.20 Purchasing Power Parity 2011 per day—declined from 37 percent in FY20 to 34 percent in FY21. However, rising food and energy prices are expected to decrease the real purchasing power of households, disproportionally affecting poor and vulnerable households that spend a larger share of their budget on these items.
“Pakistan’s economic recovery after the COVID-19 crisis indicates that the country has enormous potential to overcome challenging economic situations,” said Najy Benhassine World Bank Country Director for Pakistan. “However, sustaining the economic recovery requires addressing long-standing structural weaknesses of the economy and boosting private sector investment, exports and productivity.”
On the back of high base effects and recent monetary tightening, real GDP growth is expected to moderate to 4.3 and 4.0 percent in FY22 and FY23, respectively. Thereafter, economic growth is projected to slightly recover to 4.2 percent in FY24, provided that structural reforms to support fiscal sustainability and macroeconomic stability are implemented rapidly, and that global inflationary pressures dissipate.
However, the macroeconomic risks remain very high. These include tighter global financing conditions, potential further increases in world energy prices, and the possible risk of a return of stringent COVID-19-related mobility restrictions. Domestically, political uncertainty and policy reform slippages can also lead to protracted macroeconomic imbalances.
“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.
A special section of the report focuses on financial intermediation and how to increase financing to the real economy by addressing structural barriers that affect financial supply and demand, including credit markets. These obstacles include heavy government borrowing from the financial sector, crowding out the supply of credit to the private sector, and deepening sovereign bank ties. Low domestic savings and underdeveloped capital markets further constrain intermediary activity. Overall financial inclusion remains low, but good progress has been made to enhance financial inclusion through continued digital innovation. Addressing these constraints in the medium to long term will require concerted efforts by governments, regulators and other stakeholders.
Developments in Pakistan is a companion article to the World Bank’s bi-annual report, South Asia Economic Focus, which examines economic developments and prospects in the region and analyzes policy challenges facing countries. The Spring 2022 edition, titled “Reshaping Norms: A New Direction Forward,” suggests that growth in South Asia will be lower than previously expected due to the fallout from the war in Ukraine and ongoing economic challenges. The report also includes short- and long-term policy recommendations for countries in the region to respond to external shocks, while laying the groundwork for green, resilient and inclusive growth.