WB projects Pakistan's inflation to further surge to 29.5pc in FY23

The agricultural output is expected to contract for the first time in more than 20 years

LAHORE (Web Desk) - Pakistan’s inflation is projected to further swell to 29.5 per cent in the current fiscal year 2023 owing to higher energy and food prices and the weaker rupee, projected the World Bank (WB) in its latest report. 

However, the report on the macro poverty outlook for Pakistan indicated that inflation is expected to moderate over the forecast horizon as global inflationary pressures dispersed.

The country's real GDP growth is expected to “slow sharply to 0.4 per cent” in FY23 reflecting corrective tighter fiscal policy, flood impacts, high inflation, high energy prices and import controls.

With reduced imports, the current account deficit is projected to narrow to 2pc of GDP in the fiscal year 2023 but widen to 2.2pc of GDP in the fiscal year 2025 as import controls ease.

The fiscal deficit is projected to narrow to 6.7pc of GDP in the fiscal year 2023 and further over the medium term as fiscal consolidation takes hold. The macroeconomic outlook is predicated on the completion of the IMF-EFF programme, sound macroeconomic policy, continued structural reforms and adequate external financing.

The report further says the agricultural output is too expected to contract for the “first time in more than 20 years” owing to last year’s catastrophic floods.

Similarly the industry output is also expected to contract with supply chain disruptions, weakened confidence and higher borrowing costs and fuel prices. Output growth is expected to gradually recover in the fiscal year 2024 and 2025 but “remain below potential” as low foreign reserves and import controls continue to curtail growth.

According to the WB, poverty in Pakistan will inevitably increase with pressures from weak labour markets and high inflation. Further delays in external financing, policy slippages, and political uncertainty poses significant risks to the macro poverty outlook for the country, the global lender warns.

In the absence of higher social spending, the lower middle-income poverty rate is expected to increase to 37.2pc in the fiscal year 2023. “Given poor households’ dependency on agriculture and small-scale manufacturing and construction activity, they remain vulnerable to economic and climate shocks,” the report added.

The lower activity is expected to spill over to the wholesale and transportation services sectors, weighing on services output growth.

The report says Pakistan’s economy is under stress with low foreign reserves and high inflation. Activity has fallen with policy tightening, flood impacts, import controls, high borrowing and fuel costs, low confidence, and protracted policy and political uncertainty. Despite some projected recovery, growth is expected to remain below potential in the medium term.

Key risks to the World Bank’s outlook are the non-completion of the IMF programme due to policy slippages and the non-materialisation of expected financing. Additional risks include political instability, deterioration of domestic security and external economic conditions and financial sector risks associated with revaluation losses, liquidity shortages, and high sovereign exposure.

With high public consumption, economic growth increased substantively above potential in the fiscal year 2022 at the cost of growing imbalances that led to pressures on domestic prices, external and fiscal sectors, the exchange rate, and foreign reserves, the WB observed.

It added that these imbalances were exacerbated by the catastrophic flooding in 2022, surging world commodity prices, tightening global financing conditions and domestic political uncertainty.

Official remittance inflows dropped by 11.1pc, partly due to the exchange rate cap that made informal non-banking channels preferable.

Any decline in overall remittances would reduce households’ capacity to cope with economic shocks, adding pressure on poverty, warns the report. 

According to the WB's report, health and education sectors are also vulnerable as the high inflation and reduced incomes could lead poor households to lower school attendance and food intake.