ISLAMABAD: The World Bank says the national poverty rate in Pakistan could increase by 2.5 to 4.0 percentage points as a direct consequence of the floods, with adverse human development effects in disaster-affected areas.

The size and duration of shocks will vary across locations and households, depending on the intensity of the flooding as well as the quality of relief and reconstruction efforts, the World Bank says in its latest ‘Macro Poverty Outlook for Pakistan’ released during the course of ongoing IMF-World Bank annual meetings.

According to the outlook made available on Saturday, the high inflation and devastating floods will have an adverse impact on poverty. While rising prices reduced the real purchasing power of all households, the floods primarily affected rural areas in Sindh and Balochistan where poverty rates are already high.

Poor households are more dependent on agricultural income and spend a larger share of their income on food, and therefore will be disproportionally affected by the loss of harvest and assets like housing and livestock, and rising prices, the report notes.

The economic outlook and prospects for overdue adjustment have been significantly affected by the floods. Agricultural output is expected to decline sharply, with losses to cotton, date, wheat, and rice crops. Nearly a million livestock is estimated to have perished.

Cotton losses are expected to weigh on the domestic textile industry and the wholesale and transportation service industries. Public relief and limited reconstruction activities are expected to partially offset the loss in activity.

Real GDP growth is therefore expected to slow to 2.0 percent in the fiscal year 2023 but recover to 3.2 percent by the fiscal year 2024, supported by a recovery in agricultural production, reconstruction efforts, and projected lower global inflationary pressures.

Due to higher energy prices, flood disruptions, and the weaker rupee, inflation is projected to rise to 23.0 percent in the fiscal year 2023 but moderate over the forecast horizon with declining international energy prices and resolution of flood-related supply constraints.

Despite flood-associated effects, the current account deficit is expected to narrow slightly to 4.3 percent of GDP in the fiscal year 2023 with slower domestic economic activity and is projected to shrink further in 2024 as exports recover from flood impacts.

In line with fiscal consolidation efforts, the fiscal deficit is projected to contract modestly to 6.8 percent of GDP in FY23, despite negative revenue impacts from the flooding and increased expenditure needs. The fiscal deficit is expected to gradually narrow over the medium term as revenue mobilization measures, particularly GST harmonization and personal income tax reform, take hold.

With rapid nominal GDP growth, public debt as a share of GDP is projected to decline gradually over the forecast period, despite continued primary deficits. The macroeconomic outlook is predicated on the IMF-EFF programme remaining on track.

The outlook notes that despite an economic rebound in FY21 and fiscal year 2022, persistent structural weaknesses of the Pakistani economy, such as low productivity growth due to low investment and exports, are hindering a sustained recovery.

Expansionary Covid-related macroeconomic policies supported aggregate demand that has contributed to pressures on domestic prices, the external sector, the exchange rate, and foreign reserves. In response, the Government, amid the ongoing monetary tightening, passed a contractionary 2023 budget and reversed unsustainable energy price subsidies.

Continued policy tightening has become more challenging on account of catastrophic floods. The government will face challenges in implementing the planned fiscal consolidation, given extensive relief and recovery needs.

Additional downside risks include unexpected damages resulting from the still-evolving flooding situation that could further reduce output and worsen economic imbalances, political pressures that undermine the implementation of a coherent and prudent macroeconomic policy mix, unanticipated deterioration of external conditions, and risks associated with large fiscal and external financing needs.

The outlook emphasized that to manage these uncertainties, the government should adhere to sound economic management, while carefully targeting any new expenditures and maintaining progress on critical structural reforms, including in the energy sector.

Published in Dawn, October 16th, 2022

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