The World Bank on Thursday revised up its projection for Pakistan’s Gross Domestic Product (GDP) growth from 2.0 percent to 3.4 percent for the fiscal year 2021-22.
The World Bank’s forecast was still lower than the government of Pakistan’s 4.8 percent target for the current fiscal year.
In January 2021, the World Bank had projected Pakistan’s GDP to grow at the rate of 1.2 percent only which was revised up to two percent in June and then to 3.4 percent in its recent report of South Asia Economic Focus titled “Shifting Gears: Digitization and Services-Led Development” released on Thursday. The report said, “despite repeated COVID-19 waves, Pakistan’s economy recovered in FY21 amid effective targeted lockdowns and an accommodative monetary policy stance”. “Economic growth is expected to ease in FY22 before strengthening again in FY23. However, potential delays in the International Monetary Fund (IMF) program, high demand-side pressures, potential negative spillovers from the evolving situation in Afghanistan and more severe and contagious COVID19 waves pose downside risks to the outlook,” it added.
In line with the 25-basis point policy rate hike in September 2021, fiscal and monetary tightening are expected to resume in FY22, as the government refocuses on mitigating emerging external pressures and managing long-standing fiscal challenges. Output growth was therefore projected to ease to 3.4 percent in FY22, but strengthen thereafter to 4.0 percent in FY23 with the implementation of key structural reforms, particularly those aimed at sustaining macroeconomic stability, increasing competitiveness and improving financial viability of the energy sector, the report added.
It said the inflation was projected to edge up in FY22 with expected domestic energy tariff hikes and higher oil and commodity prices before moderating in FY23. Poverty was expected to continue declining, reaching 4.0 percent by FY23.
The current account deficit was projected to widen to 2.5 percent of GDP in FY23 as imports expand with higher economic growth and oil prices. Exports were also expected to grow strongly after initially tapering in FY22, as tariff reform measures gain traction supporting export competitiveness. In addition, the growth of official remittance inflows was expected to moderate after benefiting from a COVID-19 induced transition to formal channels in FY21.
Despite fiscal consolidation efforts, the deficit was projected to remain high at 7.0 percent of GDP in FY22 and widen to 7.1 percent in FY23 due to pre-election spending.
Implementation of critical revenue-enhancing reforms, particularly the General Sales Tax harmonization, would support a narrowing of the fiscal deficit over time. With the pandemic, the government had been focused on managing the repeated COVID-19 infection waves, implementing a mass vaccination campaign, expanding its cash transfer program, and providing accommodative monetary conditions to sustain economic growth. Grappling with the fourth COVID-19 wave, the government, as before, implemented micro-lockdowns that successfully limited the infection spread, while permitting economic activity to continue and thereby mitigating the economic fallout. While they had been accelerating, vaccination rates remain low. As of September 15, only around 10 percent of the total population had been fully vaccinated.
Major downside risks included delays and stalling of the IMF-EFF program and the consequent external financing difficulties, exceedingly high domestic demand leading to unsustainable external pressures, more contagious COVID-19 strains requiring widespread lockdowns, and a worsening of regional and domestic security conditions, including those stemming from the Afghanistan situation. a
Similarly, the services sector that accounted for 60 percent of GDP, was estimated to have expanded, as generalized lockdown measured were increasingly lifted. In contrast, agriculture sector growth was expected to had slowed, partly due to a near 30 percent decline in cotton production on adverse weather conditions. Despite slowing to 8.9 percent in FY21 from 10.7 percent in FY20, headline consumer price inflation remained elevated – mostly because of high food inflation, which was likely to disproportionately impact poorer households that spend a larger share of their income on food items compared to non-food items. With the policy rate being held at 7.0 percent throughout FY21, real interest rates were negative, supporting the recovery.