By Staff Reporter
ISLAMABAD: Pakistan’s economic recovery faces fresh headwinds from devastating floods, with the World Bank slashing its growth projection for fiscal 2026 and warning of persistent inflation pressures amid strained public finances.
Real GDP growth, previously seen accelerating to 3.4% in the year through June 2026, is now expected to hold at 3%, the Washington-based lender said in its Pakistan Development Update released on Tuesday. The downgrade reflects flood-related disruptions to agriculture and supply chains, which are set to drive inflation higher than earlier anticipated.
“Pakistan’s recent floods have imposed significant human costs and economic losses, dampening growth prospects, and adding pressure on macroeconomic stability,” Bolormaa Amgaabazar, World Bank country director for Pakistan, said in the report. “Staying the course on reforms and accelerating job creation is critical to maintaining growth along with strengthening social safety nets and infrastructure that protects the most vulnerable citizens, and that will help ensure sustainable development and economic resilience for all.”
The floods have compounded an already challenging outlook, with limited fiscal space, elevated external financing requirements and geopolitical risks clouding the horizon, the bank said. Agriculture, a key employer in rural areas, is poised for a second straight year of subdued performance due to damage to rice, cotton, sugarcane and maize crops. Food-supply shocks from the disaster are projected to push headline inflation to 7.2% in fiscal 2026, above prior estimates, before moderating to 6.8% in fiscal 2027 as commodity and energy prices ease and the exchange rate stays market-determined.
The fiscal deficit is seen remaining wide at 5.4% of GDP in fiscal 2026, reflecting relief and reconstruction spending even as consolidation continues under the International Monetary Fund’s Extended Fund Facility. The IMF program’s on-track status is assumed to anchor investor confidence and secure external funding, the report said. Debt is forecast to climb to 75.9% of GDP in fiscal 2026 on modest flood-related outlays and high financing needs, then trend lower supported by primary surpluses. Gross financing requirements will stay elevated, driven by short-term debt maturities, multilateral and bilateral repayments and upcoming Eurobond redemptions.
The current-account balance is expected to post a narrow deficit of 0.3% of GDP in fiscal 2026, with higher food imports and weaker exports partly offset by robust remittances and softer global oil prices. The gap is seen widening in fiscal 2027 as growth picks up, import demand rises, and remittance flows normalise. Poverty reduction is set to slow, with the rate measured at the national poverty line projected to ease to 21.5% in fiscal 2026 and 20.6% in fiscal 2027 from an estimated 22.2% in fiscal 2025.
The bank cited flood impacts on poor rural households, which face agricultural asset losses, scant savings and inadequate coping mechanisms, exacerbated by food-price spikes and volatile informal jobs. Higher growth and cooling inflation helped lower poverty to 22.2% in fiscal 2025 from 25.3% a year earlier, with construction and logistics, sectors employing about a quarter of the working poor, driving labor-income gains. A sharp drop in food inflation also bolstered purchasing power for households that allocate roughly 45% of budgets to food, bank officials said in a media briefing. The latest official poverty data stem from the 2019 Household Integrated Economic Survey, with subsequent crises, including Covid-19, 2022 floods and a macroeconomic downturn amid political uncertainty, likely exerting major welfare impacts, officials added.
Lacking fresh survey data, the bank used a micro-simulation tool linking macroeconomic indicators like sectoral growth, inflation and transfer values to household incomes and consumption. The poverty line stands at Rs8,231 per adult equivalent per month in 2024 prices.
On the export front, Pakistan’s goods shipments as a share of GDP have slid to 10.4% in 2024 from a 1990s average of 16%, leaving the economy reliant on debt and remittance-fueled consumption and prone to boom-bust cycles, the report said. The country once outperformed Bangladesh and India on export growth but now trails both, as well as low- and middle-income country averages.
Accounting for population, development level and market proximity, Pakistan harbors nearly $60 billion in untapped export potential, the bank estimated. Closing the gap would double the export-to-GDP ratio and align it with upper-middle-income peers, though it would demand a market-determined exchange rate, bolstered trade finance, better logistics and deeper trade pacts.
The government’s five-year National Tariff Plan, approved in the fiscal 2026 budget, targets a cut in the simple average tariff to 9.7% by 2030 from 20.2%. Full implementation would rank Pakistan among the most ambitious lower-middle-income reformers globally, alongside Vietnam and Cambodia. Digitally delivered exports have risen to about 10% of the total, yet Pakistan captures just 0.1% of the global digital-services market, compared with India’s 5.8% and Indonesia’s 0.2%.
IT services exports exceed $2.9 billion annually, making Pakistan South Asia’s second-largest player after India, but its global share is only 0.3%. “Sustaining progress will require a balanced mix of revenue and expenditure measures to manage flood impacts while maintaining progress towards fiscal consolidation,” said Mukhtar Ul Hasan, the report’s lead author. “Urgent implementation of priority fiscal reforms is essential, including broadening the tax base, strengthening tax administration, and reducing the presence of the state in the economy through state-owned enterprise divestiture and rationalising the public sector.”
The bank flagged fragmented tax policy, multiple property valuations, non-digitised land records and capacity gaps as curbs on revenue. It urged full rollout of a single portal for goods and services tax, adoption of revised advance income tax rules, harmonised property valuations, enhanced e-services, compliance risk management and prepopulated forms.
Central-bank exchange-rate interventions provide short-term calm but trigger abrupt corrections that deter investment, the report said. It advocated a deep interbank market free of State Bank of Pakistan intermediation, broader participant access, transaction-data disclosure and an end to ad hoc moves. High tariffs, limited trade finance, worsened by the Export-Import Bank’s incomplete operationalisation, and state dominance in commercial sectors continue to hamper competitiveness, the bank said. It recommended privatising key airports and power assets, public share offerings in select state-owned enterprises, a National Regulatory Delivery Office and a revised Investment Act.
“The government has placed export growth at the center of its development agenda and has made important strides in tackling policy and structural barriers, most recently through the approval of the National Tariff Policy, which will help lower costs for critical imported inputs,” said Anna Twum, a report co-author. “However, tariff reforms alone will not suffice and must be complemented by broader measures to ensure a market-determined exchange rate, strengthen trade finance, enhance trade facilitation, and expand access to export markets.”
Copyright © 2021 Independent Pakistan | All rights reserved
