ISLAMABAD: Projecting a persisting mix of sluggish growth rate and high inflationary trends with significant downside risks, the World Bank on Tuesday advocated Pakistan for a sharp fiscal adjustment of about 4pc of GDP and decisive implementation of broad-based reforms committed to the International Monetary Fund (IMF) to get out of the fiscal and macroeconomic quagmire.
“Predicated on the robust implementation of the IMF Standby Arrangement (SBA), new external financing and continued fiscal restraint, real GDP growth is projected to recover to 1.7pc in FY24 and 2.4pc in FY25”, said the World Bank’s latest “Pakistan Development Update: Restoring Fiscal Sustainability” released on Tuesday.
It estimated the rate of inflation at 26.5pc for the current fiscal year and 17pc for FY25. The WB officials in Islamabad said the massive depreciation, high exchange rates and resultant heavy bank borrowing to finance record fiscal deficits and debt servicing fuelled the spiralling multi-decade high inflation rates.
As a consequence, more than 12.5 million people are estimated to have fallen below the international poverty line ($3.65 per day) from the vulnerable stage or 39.4pc of the population under the poverty line FY23 — down from 34.2pc in FY22.
The growth forecast is slightly lower than 2pc the Washington-based agency had forecast in June and less than half the 3.5pc target set by the government. Last month, the Asian Development Bank projected Pakistan’s GDP growth rate at 1.9pc and rate of inflation at 25pc for the current fiscal year.
Advises Rs2.7tr fiscal adjustments, strict compliance with reforms suggested by IMF
The WB forecast Pakistan’s fiscal deficit at 7.7pc of GDP in FY24 and primary deficit at 0.4pc of GDP — unlike IMF’s 0.4pc of primary surplus for the current year, showing a wide gap of 0.8pc of GDP or about Rs850bn.
When highlighted, Najy Benhassine, Country Director for the World Bank in Pakistan and his colleague Adnan Ghumman said the WB’s estimate was based on the latest data until September-October of the current fiscal year compared to IMF’s projections before the beginning of the fiscal year in June. Mr Najy said even the government had set its target in June based on 9-month data.
“Without a sharp fiscal adjustment and decisive implementation of broad-based reforms, Pakistan’s economy will remain vulnerable to domestic and external shocks”, Mr Najy said warning that economic growth was therefore expected to remain below potential over the medium term with some improvements in investment and exports.
“Careful economic management and deep structural reforms will be required to ensure macroeconomic stability and growth,” he said and noted that with inflation at record highs, rising electricity prices, severe climate shocks, and insufficient public resources to finance human development investments and climate adaptation, critical reforms must be undertaken to build the fiscal space and public means to invest into inclusive, sustainable, and climate-resilient development.
The bank also presented a three-pronged Rs2.723 trillion (4.1pc of GDP size in FY22) fiscal consolidation plan envisaging about Rs1.124tr (1.7pc of GDP) savings through reforms for fiscal expenditure rationalisation, Rs862bn (1.3pc of GDP) fiscal space through reforms in reducing debt servicing cost and SOEs control and about Rs737bn (1.1pc of GDP) through revenue enhancing reforms.
Senior Economist Derek Chen said the adoption of a Treasury Single Account (TSA) alone would provide over Rs400bn savings per annum against public funds and cash balances with banks while the government was resorting to bank borrowing from the banking industry and paying heavy interest costs.
About Rs2tr worth of cash balances had been kept in the banking deposits but not accounted for in the government account. This meant the government was not earning a return on these accounts but paying about 25pc markup on borrowing of an equivalent amount from the banking sector. The TSA could reduce debt servicing costs by Rs400-500bn.
On the other hand, the government is thus crowding out private sector investments as banking credit to the government rose by more than 400pc in 2011-21 decade — leaving around 17pc for the private sector — the lowest in the region.
The bank officials said that as the inflation reached multi-decade heights with electricity and petroleum prices, the government responded with increased interest rates and tight fiscal policy which led to increased government borrowing from the commercial banks that had obtained liquidity from the central bank, thus diluting the impact of monetary policy tightening.
The bank advised rationalisation of government allowances above salaries including vehicles and pensions and revisiting the minimum retirement age. On the revenue side, the bank said while the collection was among the lowest in the region, the tax rates on existing taxpayers were among the highest — showing a rigid tax base in the absence of key sectors — agriculture, real estate and retail sector paying their due share.
Pakistan’s total revenue collection averaged 12.8 of GDP in the past decade, substantially lower than the South Asian average of 19.2pc. Ironically on top of it, the total revenue has been declining over time.
“Careful economic management and deep structural reforms will be required to ensure macroeconomic stability and growth,” said Mr Najy.
Published in Dawn, October 4th, 2023