In absence of major, sustained reforms, Pakistan to continue facing liquidity issues: World Bank

Poverty reduction projected to stall in the medium term due to weak growth, low real labor incomes, and persistently high inflation, says lender in 'Pakistan Development Update'

In absence of major, sustained reforms, Pakistan to continue facing liquidity issues: World Bank

The World Bank has warned that Pakistan will continue to face liquidity issues in the medium term, due to trade deficit and limited access to external financing, unless authorities take “major and sustained economic reforms.”

The bank in its latest report, ‘Pakistan Development Update: Fiscal Impact of Federal State-Owned Enterprises’, released on Tuesday, expected Pakistan’s growth prospects to remain constrained over the medium term.

“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,” the World Bank said.

The World Bank was of the view that even with the recent successful completion of the International Monetary Fund (IMF) Stand-By Arrangement (SBA) and continued rollovers, Pakistan foreign exchange reserves are projected to remain low, hovering around 1.3 months of total imports over FY24–26.

Last month, Pakistani authorities successfully concluded the last review of the SBA, with funds to the tune of $1.1 billion expected to be disbursed in coming weeks. However, the country remains in talks with the international lender “for a longer and larger” programme to permanently address the macroeconomic issues of the country.

Meanwhile, the World Bank said that due to continued import management measures and tight monetary and fiscal policies are expected to disrupt domestic supply chains and mute aggregate consumption and investment.

“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% in FY24,” said World Bank.

However, as confidence improves with the expected implementation of a new IMF programme, output growth is expected to gradually recover to an average of 2.5% over FY25 and FY26 but remain below potential in the medium term.

Agriculture to drive growth

On GDP growth, World Bank noted that amid a recovery from the 2022 floods in FY23, agricultural output is expected to grow rapidly by 3% 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% over FY25–26. With easing import management measures and spillovers from strong agriculture performance, industry is expected to recover, growing at 1.8% in FY24,” WB said.

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

The World Bank noted that tight policy and import management measures will drag on aggregate demand in the near term.

“Growth in private consumption is projected to decline to 1.7% in FY24, due in part to erosion in real incomes because of high inflation and in part to administrative measures, including the import management measures.”

“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,” read the report.

Inflation to remain high

World Bank expected inflation to remain elevated in FY24 due to higher domestic energy prices.

“Consumer price inflation is projected to remain elevated at 26% in FY24,” read the report.

“The increase in prices is driven by domestic gas, electricity, and fuel tariff adjustments resulting in significant increase in domestic energy prices,” it said.

However, inflation will gradually moderate in FY25–26 due to a high base effect and as global commodity prices ease.

Current Account to remain manageable

On the current account front, World Bank expects that the current account deficit (CAD) is expected to remain low as import management measures continue.

“The CAD is expected to remain low at 0.7% of GDP in FY24 and to further narrow to 0.6% of GDP in FY25 and FY26,” it said.

World Bank noted that Pakistan’s external financing needs will remain significant throughout the projection period, due to IMF repayments and maturing Eurobonds.

“Despite a low CAD, the reserve position is therefore projected to further weaken, reflecting limited external financing,” it said.

Poverty to remain elevated

World Bank also warned that no poverty reduction is expected over the medium term in Pakistan because of weak growth and continued high inflation, with some 40% of Pakistanis living below the poverty line.

“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% over FY24–26,” read the report.

Moreover, 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, World Bank said.