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Thursday June 13, 2024

World Bank cuts Pakistan GDP growth projection to 2pc

The World Bank has revised Pakistan’s GDP growth projection downward from 4% to 2% for the current fiscal year

By Mehtab Haider
January 11, 2023
The World Bank building. TheAFP file
The World Bank building. TheAFP file

ISLAMABAD: The World Bank (WB) has revised Pakistan’s GDP growth projection downward from four percent to two percent for the current fiscal year, saying the country’s precarious economic situation, with low foreign exchange reserves and large fiscal and current account deficits, has further worsened by severe flooding. “Nonetheless, Pakistan faces mounting economic difficulties and Sri Lanka remains in crisis. In all regions, improvements in living standards over the half-decade to 2024 are expected to be slower than from 2010-19,” the World Bank stated in Global Economic Prospects released on Tuesday.

In Pakistan, the report stated that an already precarious economic situation, with low foreign exchange reserves and large fiscal and current account deficits, was exacerbated last August by severe flooding, which cost many lives. About one-third of the country’s land area was affected, damaging infrastructure, and directly affecting about 15 percent of the population.

Recovery and reconstruction needs are expected to be 1.6 times the FY2022/23 national development budget (Government of Pakistan). The flooding is likely to have seriously damaged agricultural production — which accounts for 23 percent of GDP and 37 percent of employment — by disrupting the current and upcoming planting seasons and pushed between 5.8 and 9 million people into poverty. Policy uncertainty further complicates the economic outlook.

Pakistan, with low foreign exchange reserves and rising sovereign risk, saw its currency depreciate by 14 percent between June and December and its country risk premium rise by 15 percentage points over this same period.

Pakistan’s consumer price inflation reached 24.5 percent in December on an annual basis, recently coming off its highest rate since the 1970s.

This is mainly due to weak growth in Pakistan, which is projected at 2.0 percent in FY2022/23, half the pace that was anticipated last June. Pakistan faces challenging economic conditions, including the repercussions of the recent flooding and continued policy and political uncertainty. As the country implements policy measures to stabilise macroeconomic conditions, inflationary pressures dissipate and rebuilding begins following the floods, growth is expected.

The recent floods in Pakistan are estimated to have caused damage equivalent to about 4.8 percent of GDP (Government of Pakistan et al. 2022). Extreme weather events can exacerbate food deprivation, cut the region off from essential supplies, destroy infrastructure, and directly impede agricultural production.

Estimates for Bangladesh suggest that current climate trends will see rice, vegetables and wheat yields decline by 5-6 percent by 2050 compared to a no-climate change scenario. Extreme weather can also complicate the implementation of macroeconomic policies.

For example, in India, more erratic monsoon rains have translated into more volatile food prices, destabilising households’ inflation expectations, undermining the ability to forecast inflation and muddling the formulation of monetary policy, the report said.

India used its international reserves (at $550 billion in November, or 16 percent of GDP) to curb excess exchange rate volatility helping to limit rupee depreciation, and its sovereign spread has remained broadly stable at 1.4 percent in December, similar to average levels in the five years before the pandemic.