The World Bank has projected Pakistan’s GDP growth rate at 2 percent for 2021-22, saying that poverty is projected to remain high. The Bank in its latest report “Pakistan-macro poverty outlook” stated that the country’s economy was severely impacted by the COVID-19 shock in fiscal year 2020 leading to an increase in poverty. With the lifting of lockdown measures, the economy is showing signs of a fragile recovery. Growth is expected to gradually strengthen but remain muted in the medium term. Fiscal deficit and debt levels are projected to remain elevated but to gradually improve. Risks to the outlook include new waves of Covid-19 infections and delays in the implementation of critical structural reforms.
Pakistan’s output growth is expected to recover gradually over the medium-term, averaging 2.2 percent over fiscal year 2021-23, mostly due to contributions from private consumption. However, sectors that employ the poorest, such as agriculture, are expected to remain weak, and therefore poverty is likely to remain high.
The baseline outlook is predicated on the absence of significant infection flare-ups that would require more extensive lockdowns. The current account (C/A) deficit is projected to narrow to 0.8 percent of GDP in fiscal year 2021, as a wider trade deficit is more than offset by stronger remittances inflows. However, it is expected to increase over the medium term. Exports are projected to grow from fiscal year 2022 onwards, as external conditions become more conducive and tariff reforms gain traction, but imports are also expected to increase in line with stronger domestic activity and higher oil prices. While fiscal consolidation efforts are expected to resume, the deficit is projected to remain elevated at 8.3 percent of GDP in fiscal year 2021, partly due to the settlement of arrears in the power sector. As critical revenue-enhancing reforms gain pace and expenditure rationalization efforts resume, the fiscal deficit is projected to gradually narrow over the medium-term. Still, public debt will remain elevated in the medium term, as will Pakistan’s exposure to debt-related shocks.
The report further noted that Pakistan’s economy has been growing slowly over the past two decades. Annual per capita growth has averaged only 2 percent, less than half of the South Asia average, partly due to inconsistent macroeconomic policies and an under reliance on investment and exports to drive economic growth. Short periods of rapid consumption-fueled growth frequently led to sizable current account and fiscal deficits that ultimately required policy tightening, resulting in recurrent boom-bust cycles.
In early fiscal year 2020, which runs from July 2019 to June 2020, following one such episode of external and fiscal imbalances, the country entered a 39-month IMF Extended Fund Facility. The associated adjustment measures, including fiscal consolidation, contributed to a reduction of the imbalances over the year and improved macroeconomic stability. However, the containment measures adopted in response to the COVID-19 pandemic led to a collapse in economic activity during the final quarter of FY20. As a result, GDP growth is estimated to have contracted by 1.5 percent in FY20. Half of the working population saw either job or income losses, with informal and low-skilled workers employed in elementary occupations facing the strongest contraction in employment. As a result, poverty incidence is estimated to have increased in FY20 from 4.4 to 5.4 percent, using the international poverty line of $1.90 PPP 2011 per day, with more than two million people falling below this poverty line. Moreover, 40 percent of households suffered from moderate to severe food insecurity. The government, therefore, focused on mitigating the adverse socioeconomic effects of the pandemic, and the IMF program was temporarily put on hold.
Major risks to the outlook include the possibility of new waves of infections, the emergence of new vaccine-resistant strains, and setbacks in mass vaccinations. In addition, more delays in the implementation of critical structural reforms could lead to further fiscal and macroeconomic imbalances.