World Bank economist calls for continued reforms for lasting growth

KARACHI: Pakistan’s economy has stabilised, but in the medium term, a strong recovery will require the unwavering execution of a comprehensive reform agenda, an economist said.

Aroub Farooq, economist with the World Bank, joined a seminar on Friday titled ‘Pakistan’s economic outlook as the nation navigates what appears to be a pivotal moment of recovery’. She said that although the macroeconomic situation of the country has improved, the current recovery is neither sustainable nor sufficient because economic vulnerabilities remain high.

CFA Society Pakistan organised the event.

“Over the medium term, a robust economic recovery will require the steadfast implementation of a broad-based reform programme,” Farooq said.

She said in a presentation that the government must solve the issues facing the energy sector, increase the tax base, enhance the business climate and competitiveness, reduce the state’s distorting influence on the economy, and improve the quality of spending.

She added that with inflation reaching a peak of 38 percent in May 2023 and foreign exchange reserves falling to critically low levels, Pakistan’s economy was on the verge of crisis in FY23. The inappropriate policy setting combined with political uncertainty had major negative impacts on confidence and investments. As a result, poverty rose and growth stalled. An additional 12.5 million people fell into poverty as a result of rising prices, supply chain disruptions brought on by floods, and low confidence.

Pakistan implemented emergency stabilization measures under a new IMF programme, enabling new foreign inflows, Farooq said and added that the sharp fiscal contraction, subsidy reform, import controls, and capital controls supported much-needed adjustment, but negatively impacted growth and investment.

The stabilisation continued with sound macro policies and the completion of elections. The exchange rate has remained stable, inflation slowed, and foreign reserves recovered, she noted. According to the World Bank, Pakistan’s projected GDP growth rates are 2.8 per cent for FY25 and 3.2 per cent for FY26, indicating positive economic momentum. Inflation is expected to decrease to 11.1 per cent in FY25 and to 9.0 per cent in FY26. The current account deficit is expected to widen with recovering growth to 0.6 per cent of GDP in FY25 and further to 0.7 per cent in FY26.

The forex reserves are expected to grow due to the IMF inflows and new external financing. The fiscal balance is expected to increase to 7.6 per cent in FY25 and then slow down slightly to 7.3 per cent in FY26. Debt is projected to increase in the medium term to 73.8 per cent of GDP in FY25 and further to 74.7 per cent in FY26. Sakib Sherani, CEO of Macroeconomic Insight, said macro-stabilisation has consolidated as high-frequency indicators have shown improvement. The current account has shown a surplus, the rupee has remained stable, and the inflation has declined rapidly.

He said Pakistan’s external financing needs are significant for the foreseeable future. This is heavily dependent on bilateral flows and debt rollovers. The pickup in the foreign direct investment inflows to cover the external funding gap is unlikely.

According to him, the soft global demand is likely to impact exports. He expects the rupee to continue facing pressure in the medium term.