While the growth deceleration it forecasts is global, political uncertainty and flood devastation are taking additional toll on Pakistan’s economy, says the Bank’s Global Economic Prospects.
By Ahmer Kureishi
ISLAMABAD: As they drastically cut their global growth projection for 2023 heralding a broad-based, sharp, and long-lasting slowdown, economists at the World Bank Group are forecasting even more economic hardship for Pakistan on account of continued political uncertainty and the devastation caused by last year’s cataclysmic flooding.
Launched in Washington the other day, the latest issue of the Group’s flagship Global Economic Prospects report projects the world economy to grow at a mere 1.7 percent in 2023, 1.3 points down from the 3 percent growth it forecast just six months ago.
But while this negative outlook is shared by all economies around the world, emerging markets and developing economies are worse off than developed economies because of their high levels of indebtedness and meagre foreign exchange buffers – both particularly pronounced in the case of Pakistan.
However, Pakistan’s misfortunes do not end there. Taking additional and drastic toll on the country’s economy are last year’s cataclysmic floods and continued political uncertainty – both of which factor into the GEP calculus, which forecasts GDP growth rates of 2 percent and 3.2 percent for 2023 and 2024 respectively.
“In Pakistan, an already precarious economic situation, with low foreign exchange reserves and large fiscal and current account deficits, was exacerbated last August by severe flooding, which cost many lives”, says the report.
“About one-third of the country’s land area was affected, damaging infrastructure, and directly affecting about 15 percent of the population. Recovery and reconstruction needs are expected to be 1.6 times the FY2022/23 national development budget.
“The flooding is likely to have seriously damaged agricultural production—which accounts for 23 percent of GDP and 37 percent of employment—by disrupting the current and upcoming planting seasons and pushed between 5.8 and 9 million people into poverty.”
The report says policy uncertainty further complicates Pakistan’s economic outlook.
Closely tied to political uncertainty, policy uncertainty is a relatively new concept that still has no universally accepted definition. Prof Steven J. Davis of the University of Chicago Booth School of Business says policy uncertainty has three components.
These are: (1) Uncertainty about who will be making the policy decisions that have economic consequences; (2) uncertainty about what policy decisions the people who end up in charge will make; and (3) uncertainty about how particular policy decisions will affect the economy.
Pakistan has been roiled by policy and political uncertainty at least since April 2022, when the parliament booted out former Prime Minister Imran Khan in a constitutionally sacrosanct vote of no-confidence.
Although the government that succeeded Khan has a constitutional mandate to stay in power at least until August 13, 2023, Khan has been adamant on snap polls, agitating the street and pressing the military – that only recently pulled out of politics – to return and put him back into power irrespective of what the law and Constitution say.
The uncertainty created by this strategy has been a regular feature of recent adverse rating actions taken by international rating agencies on Pakistan. The government has looked powerless in the face of Khan’s hardball politics, and inefficacious on the economic front, letting the country’s flimsy forex cushion erode and the rupee bleed value.
The GEP says: “Pakistan, with low foreign exchange reserves and rising sovereign risk, saw its currency depreciate by 14 percent between June and December and its country risk premium rise by 15 percentage points over this same period”.
Pakistan is among the countries where fiscal and monetary policies have become less accommodative more recently, as authorities seek lower fiscal deficits and higher real interest rates to stem external financing pressures and bear down on rising inflation.
The brunt of this seemingly endless economic deterioration has fallen on the common Pakistani, struggling under the burden of unprecedented inflation, with millions more falling below the poverty line in recent months.
It did not help that the Pakistani central bank played along a globally synchronised monetary tightening in recent months in an effort to stem stellar inflation and seek macroeconomic stability.
The GEP notes that Pakistan’s annualised consumer price inflation reached 24.5 percent in December, its highest level since the 1970s.
“As the country implements policy measures to stabilize macroeconomic conditions, inflationary pressures dissipate, and rebuilding begins following the floods, growth is expected to pick up to 3.2 percent in FY2023/24, still below previous projections.”
If we look at the regional context, growth in the South Asia region is projected to slow to 5.5 percent in 2023 on slowing external demand and tightening financial conditions before picking up slightly to 5.8 percent in 2024. The GEP says deteriorating global environment will continue to weigh on investment in the region.
Risks to the regional outlook include further pressure from tightening global financial conditions; higher-than-projected inflation leading to lower real incomes and spending; and the re-emergence of financial sector stress.
The GEP says dwindling international reserves and rising sovereign spreads increase the risk of more economies falling into crisis.
Looking at the global prospects, growth is projected to decelerate sharply this year, to its third weakest pace in nearly three decades, overshadowed only by the 2009 and 2020 global recessions.
The GEP says urgent global action is needed to mitigate the risks of global recession and debt distress in EMDEs.
“Given limited policy space, it is critical that national policy makers ensure that any fiscal support is focused on vulnerable groups, that inflation expectations remain well anchored, and that financial systems continue to be resilient.
“Policies are also needed to support a major increase in EMDE investment, including new financing from the international community and from the repurposing of existing spending, such as inefficient agricultural and fuel subsidies.
The global deceleration forecast by the GEP reflects synchronous policy tightening aimed at containing very high inflation, worsening financial conditions, and continued disruptions from Russia’s invasion of Ukraine.
Says the report: “The United States, the euro area, and China are all undergoing a period of pronounced weakness, and the resulting spillovers are exacerbating other headwinds faced by emerging market and developing economies (EMDEs).
The combination of slow growth, tightening financial conditions, and heavy indebtedness is likely to weaken investment and trigger corporate defaults. Further negative shocks—such as higher inflation, even tighter policy, financial stress, deeper weakness in major economies, or rising geo- political tensions—could push the global economy into recession.
“In the near term, urgent global efforts are needed to mitigate the risks of global recession and debt distress in EMDEs. Given limited policy space, it is critical that national policy makers ensure that any fiscal support is focused on vulnerable groups, that inflation expectations remain well anchored, and that financial systems continue to be resilient.
“Policies are also needed to support a major increase in EMDE investment, which can help reverse the slowdown in long-term growth exacerbated by the overlapping shocks of the pandemic, the invasion of Ukraine, and the rapid tightening of global monetary policy.
“This will require new financing from the international community and from the repurposing of existing spending, such as inefficient agricultural and fuel subsidies.”
Pakistan’s recent success in securing global support for its reconstruction effort in the wake of the devastation wrought by last year’s floods should help cushion the country somewhat from the cataclysmic shock.
The International Monetary Fund (IMF) and Pakistan’s bilateral lenders are also supportive of the government’s efforts for macroeconomic stabilisation.
Still, the country’s hopes for betterment at the grassroots level lie in the government’s success in kickstarting trade and investment and raising the nation’s abysmally low tax-to-GDP ratio.
However, amid the thick clouds of political instability shrouding the country’s horizons, it is far from clear if the government has the vision and will required to undertake the bold measures necessary to achieve those ends.
The GEP report may be read in full below.
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