The World Bank has slashed Pakistan's economic growth rate forecast for the current fiscal year to 4.3 per cent, down by almost one per cent against last year, and said the last ditch energy subsidies by the outgoing government put an additional burden on budget and threaten the International Monetary Fund programme.
Launching its latest 'South Asia Economic Focus Reshaping Norms: A New Way Forward' on Wednesday, the World Bank's Chief Economist for South Asia Region Hans Timmer said Pakistan had earlier followed its agreement with the IMF to remove tax exemptions and increase the tax on fuels.
However, rising energy prices domestically and challenges from political opposition forced the government to offer electricity and fuel price relief in February.
“While these measures can help reduce fluctuations in domestic prices, they also constitute a direct burden or hidden liability on the government's budget, which could increase fiscal vulnerabilities going forward,” Timmer was quoted as saying in a Dawn News report on Thursday.
“GDP growth is expected to slow to 4.3 pc in FY22 (against 5.6pc last year) and to 4pc in FY23,” he said.
In January, Pakistan’s GDP growth was put at 5.2 per cent which has since been changed.
"This comes amid monetary tightening measures that began in September 2021, high base effects from the previous year, and continued high inflation eroding real private consumption growth,” the Bank said.
“The financing of the price cuts or subsidies can create an additional burden on the fiscal budget, threaten the ongoing programme with the IMF, and limit the use of the fiscal budget on other, more productive projects”, it said ahead of the IMF-WB Annual Spring Meetings beginning early next week.
These subsidies were "unsustainable and ineffective" and advocated that right prices should be charged to consumers and redistributed to poor households, the Bank noted.
The Bank noted that one of Pakistan’s challenges in the current environment was its energy subsidies, which were the largest in the region. Inflation is expected to rise in all countries in 2022 and reach double digits in Pakistan and Sri Lanka before subsiding in 2023.
In Pakistan, high inflation has pushed the real lending rate briefly into negative territory in 2021. But a series of monetary tightening measures lowered inflation expectations, and the real lending rate has been positive since the end of 2021.
On the fiscal side, accumulated government debt in Pakistan during Covid-19 pandemic may lead to fiscal consolidation measures, which can face political resistance. General government debt has reached over 70 per cent of GDP.
The Bank noted that Pakistan experienced the mildest exports contraction in the region in 2020, and the recovery led by the textile sector was also the most rapid. Pakistani goods exports fell 54 per cent year-over-year in April 2020 at the height of the pandemic. Since late 2020, the textile sector, which makes up more than 60 per cent of total goods exports, has led the recovery, the Dawn report said.