Pakistan’s economy slowed sharply in fiscal year 2023 with real gross domestic product (GDP) estimated to have contracted by 0.6 per cent, according to the World Bank.

In a report released on Tuesday, titled ‘Pakistan Development Update: Restoring Fiscal Sustainability’, the global body said the decline in economic activity in the country reflects the cumulation of domestic and external shocks including the floods of 2022, government restrictions on imports and capital flows, domestic political uncertainty, surging world commodity prices, and tighter global financing.

The report said the previous fiscal year ended with significant pressure on domestic prices, fiscal and external accounts and exchange rate, and loss of investor confidence.

“The difficult economic conditions along with record high energy and food prices, lower incomes, and the loss of crops and livestock due to the 2022 floods, have significantly increased poverty.”

As per the report, the poverty headcount is estimated to have reached 39.4pc in fiscal year 2023, with 12.5 million more Pakistanis falling below the lower-middle income country poverty threshold ($3.65/day 2017 per capita) relative to 34.2pc in fiscal year 2022.

“Careful economic management and deep structural reforms will be required to ensure macroeconomic stability and growth,” said World Bank Country Director for Pakistan Najy Benhassine said in the report.

He added: “With inflation at record highs, rising electricity prices, severe climate shocks, and insufficient public resources to finance human development investments and climate adaptation, it is imperative that critical reforms are undertaken to build the fiscal space and public means to invest into inclusive, sustainable, and climate-resilient development.”

Without a sharp fiscal adjustment and decisive implementation of broad-based reforms, Pakistan’s economy will remain vulnerable to domestic and external shocks.

Predicated on the robust implementation of the IMF stand-by arrangement (SBA), new external financing and continued fiscal restraint, real GDP growth is projected to recover to 1.7pc in fiscal year 2024 and 2.4 per cent in fiscal year 2025, the report added.

It said economic growth was therefore expected to remain below potential over the medium term with some improvements in investment and exports.

According to the report, limited easing of import restrictions thanks to new external inflows will widen the current account deficit in the near term and weaker currency and higher domestic energy prices will maintain inflationary pressures.

“While the primary deficit is expected to narrow as fiscal consolidation takes hold, the overall fiscal deficit will decline only marginally due to substantially higher interest payments.”

The report underlined that the economic outlook was subject to extremely high downside risks, including liquidity challenges to service debt payments, ongoing political uncertainty, and external shocks.

“These macroeconomic challenges can be addressed through comprehensive fiscal reforms of tax policy, rationalisation of public expenditure, better management of public debt, and stronger inter-government coordination on fiscal issues,” said Aroub Farooq, economist at the World Bank, and author of the report.

To regain stability and establish a base for medium-term recovery, the report recommended reforms to drastically reduce tax exemptions and broaden the tax base through higher taxes on agriculture, property and retailers; improve the quality of public expenditure by reducing distortive subsidies, improving the financial viability of the energy sector, and increasing private participation in state-owned enterprises.

The Pakistan Development Update is a counterpart to the semiannual South Asia Development Update by the World Bank. This report assesses economic developments, prospects, and policy challenges within the South Asia region, the lender said.