Pakistan’s economic reckoning

The annual and spring meetings of the International Monetary Fund (IMF), and the World Bank (WB) are key events for the global economic community.

These meetings, attended by high-level officials such as finance ministers, central bankers from member countries, and decision-makers of other regional lenders, serve as crucial platforms for discussing transnational issues like macroeconomic stability, climate change, and debt sustainability. The discussions that unfold here play a significant role in shaping decision-making processes and strategies for resource mobilization, particularly for developing nations.

The 2024 Spring Meetings, themed 'Vision to Impact,' are not just another event on the calendar. but an important opportunity to translate broad visions and promises into actionable and impactful realities. These discussions, coinciding with the release of global, regional, and country-wise economic updates, are particularly relevant. For Pakistan, these updates are especially pertinent as they shed light on the persistent challenges its economy faces.

The bad news is that according to the latest reports from the IMF, the World Bank, and the Asian Development Bank (ADB), Pakistan’s economy has undergone a significant downturn in the last fiscal year (FY2023), with the real GDP growth rate contracted to negative 0.2 per cent. The agricultural sector’s growth was halved to 2.3 per cent, industry contracted by 3.8 per cent, and services growth nearly stagnated at 0.1 per cent. According to the World Bank and ADB, this decline is a consequence of the combined effect of different factors, including devastating floods, political unrest, and ineffective policy measures, which severely impacted investment, consumption, and production.

Inflation in Pakistan has skyrocketed to a historic peak of 29.2 per cent, driven by supply disruptions, currency depreciation, and dramatic increases in food and energy prices. Notably, food prices, which constitute more than half of the overall price index, saw a staggering rise from about 13 per cent to nearly 40 per cent (before taming down to 29 per cent last month).

Investment has also taken a severe hit, with public investment dropping by 31.6 per cent and private investment by 14.6 per cent, reflecting a grim economic outlook and constrained fiscal resources. To address these challenges, the State Bank of Pakistan elevated its policy rate by 700 basis points to 22.0 per cent, aiming to control inflation and manage external imbalances.

These chronic economic challenges have severe implications for human development in Pakistan. The United Nations Development Program (UNDP)’s recently released human development report indicates that Pakistan ranks 164 out of 193 countries on the Human Development Index (HDI), placing it in the 'low' human development category (Afghanistan is the only other South Asian nation in this category).

The economic turmoil has exacerbated inequality and restricted access to essential services like quality education and healthcare, directly affecting the living standards necessary for improving the HDI. A significant 33 per cent decline in Pakistan’s inequality-adjusted HDI highlights the considerable internal disparities within the country. In terms of gender inequality, the country’s rank remains unchanged at 135 out of 166 countries. The Multidimensional Poverty Index (MPI) score remains unchanged at 0.198, indicating persistent challenges whose resolution requires something beyond doing business as usual.

The good news is that, despite the current economic and human development challenges, there is a promising pathway forward as outlined by multilaterals such as the UNDP, World Bank, IMF, and ADB. UNDP Pakistan Country Director Samuel Rizk notes that with a new government in place and ambitious reform plans, there is a significant opportunity for prosperity in Pakistan. This vision, which requires substantial mobilization of climate and SDG financing, is not only feasible but also holds the potential to uplift everyone, enhancing the prospects for human development across all societal layers. Likewise, World Bank Pakistan Country Director Najy Benhassine reminds us that Pakistan has enormous untapped development potential, which must now be realized through bold and decisive policy reforms.

What are those bold and decisive reforms?

Both ADB and the World Bank emphasize the need for structural reforms focused on enhancing fiscal management, rejuvenating the energy sector, and rectifying inefficiencies in state-owned enterprises. These reforms are crucial for broadening the tax base, reducing fiscal deficits, and making strategic investments in infrastructure that are necessary to support economic recovery and sustainability. There is a consensus on these foundational steps needed to stabilize and stimulate Pakistan's economy.

However, the ‘banks’ diverge slightly in their specific emphases: the ADB places a greater focus on enhancing women's financial inclusion and leveraging technology to boost productivity, particularly in the agricultural and industrial sectors. This focus aims to integrate more inclusive practices into the economic fold.

On the other hand, the World Bank advocates for robust measures to ensure fiscal consolidation and monetary stability. The Bank also emphasizes that the fiscal impact of state-owned enterprises (SOEs) is substantial, with ongoing losses since 2016. It stresses the urgent need for reforms to enhance SOE performance, efficiency, and governance. The World Bank advocates: “Privatizing SOEs and implementing the SOE Triage exercise completed in 2021 could significantly reduce fiscal drains”.

All multilateral partners agree: policy consistency, robust governance, and strategic infrastructure development are the keys to restoring investor confidence and fostering sustainable economic growth. When executed effectively, these reforms are projected to stabilize and gradually stimulate growth, with GDP growth anticipated at around 2.0 per cent (World Bank 1.8 per cent, ADB 1.9 per cent, and IMF 2.0 per cent) in the ongoing fiscal year and 2.8 to 3.5 per cent in FY2025 (the IMF anticipates that it can be 3.5 per cent in FY2025). The IMF also projects that the inflation rate will decrease to 24.8 per cent in 2024 and further down to 12.7 per cent in 2025.

There is little room to disagree with the ADB and World Bank’s analyses that Pakistan’s economy will bounce back by FY2025, provided the above-mentioned reforms are undertaken. Both lack detailed assessments of how the proposed reforms will address the underlying issues and risks highlighted in their reports, such as high inflation, low investment, and sectoral contractions. Additionally, perhaps constrained by their mandate, their reports carry very limited discussion on addressing political instability and its economic ramifications, which are crucial for achieving sustainable growth.

More clarity is also needed on long-term economic strategies, particularly regarding sustainable development, debt sustainability, and diversification of the economy. However, the consensus among multilateral partners provides a solid foundation for these discussions and future actions.

Pakistan stands at a crossroads, confronting a choice between persevering with traditional financial bailouts and genuinely transformative economic and social reform. The prospect of returning to the IMF for assistance may not be the preferred route for many among the treasury benches, yet it presents an opportunity not merely to stabilize the economy but to reshape it fundamentally. Likewise, the upcoming negotiations with the IMF, spearheaded by Finance Minister Senator Aurangzeb during the Spring Meetings, are not just another round of fiscal adjustments but a crucial juncture to advocate for and secure a commitment to human development.

Going by the current theme of the Spring Meetings, the implementation of the next IMF programme offers a unique opportunity to enforce economic discipline while broadening the focus to include substantial investments in Pakistan's human capital for a visible impact on human development. This approach is critical, as sustainable economic growth cannot be achieved without enhancing the social and human dimensions.

Education, health, social protection, and gender equality must be integral components of the reform agenda, ensuring that economic advancements are inclusive and equitable. The next IMF programme should aim not only to satisfy short-term financial metrics but also to establish a foundation for long-term development that prioritizes the well-being and potential of Pakistan’s population.

By effectively integrating human development goals with economic policies, Pakistan can leverage spring meetings’ engagement to catalyze much-needed societal change. Such a comprehensive approach promises not just a positive economic outlook but a reinvention of Pakistan’s developmental trajectory, ensuring a higher quality of life for all its citizens.

The writer heads the Sustainable Development Policy Institute. He tweets/posts @abidsuleri