The World bank reduced Pakistan’s economic growth rate to 4.3 per cent for the current fiscal year. It is re-estimated down by approximately one per cent as compared to last year and mentioned that last-ditch energy subsidies by the outgoing government enhanced the expenses of the budget and shook the International Monetary Fund Programme.
Earlier Pakistan had followed its agreement with the IMF to increase fuel tax and remove tax exemptions.
On Wednesday, while launching the latest “South Asia Economic Focus Reshaping Norms: A New Way Forward,” South Asian Region Chief Economist of World Bank Hans Timmer said that Pakistan had followed its agreement with the IMF to increase fuel tax and remove tax exemptions.
In February, the government of Pakistan was forced to offer electricity and fuel price relief due to the rise in domestic energy prices and continued pressure from the political opposition.
“These measures are necessary to reduce the price fluctuations in domestic values, but they are creating more liability on the government budget whether directly or indirectly, which could result in fiscal vulnerabilities in the near future,” Timmer said on Thursday in a Dawn News report.
He further said, “GDP growth is expected to slow to 4.3 pc in FY22 and 4 pc in FY23 compared to 5.6 pc previous year.
Pakistan’s GDP growth was put at 5.2 per cent in January, which has been changed.
The Bank said, “In September 2021, monetary tightening measures were taken, the combination of high base effects from last year and continue high inflation rate destroying real private consumption growth,”
“Financing of subsidies and price cuts can increase the financial burden of the fiscal budget, risking the continuing program with the IMF, which will put limits on other usages of the fiscal budget that can be more productive,” said a week before the commencement of IMF-WB Annual Spring Meetings.
The Bank noted that subsidies weren’t effective and sustainable, which indicated that the right price should have been charged to consumers and redistributed to poor households.
Further, Bank noted that Pakistan is also facing the challenge of energy subsidies in the current environment, the largest in the entire region.
This year we can see a rise in Inflation in all countries, especially in Pakistan and Sri Lanka, where it can reach double digits in 2023 before subsiding.
Moreover, Pakistan has been facing high Inflation, which moved real lending rates to nearly negative in 2021. The series of monetary tightening measures successfully decreased inflation expectations, resulting in a positive real lending rate by the 2021 end.
Due to the covid-19 pandemic, general government debt has reached over 70 percent of GDP; high accumulated government debt can lead to fiscal consolidation measures. These measures may face antagonism from political parties.
In addition, the Bank noted that Pakistan experienced a not-so-strong contraction for exports in 2020 in the region, and the textile sector also showed a fast recovery.
Because of the Pandemic, the export of Pakistani goods fell by 54 per cent as compared to the previous year in April 2020.
The Dawn reporter said, “since the end of 2020, the textile sector has shown recovery, contributing more than 60 per cent of total goods exports”.