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Pakistan’s inflation to worsen soon, may rise to 29.5pc in FY23: World Bank

15 April: The World Bank has warned that Pakistan’s inflation is expected to rise further to 29.5 percent in fiscal 2023 due to higher energy and food prices and a weaker rupee.

However, the World Bank’s Macroeconomic Poverty Outlook report for Pakistan, available on Friday, said inflation is expected to moderate over the forecast horizon as global inflationary pressures dissipate.

Real GDP growth is expected to “decelerate sharply to 0.4 percent” in fiscal 2023 due to corrective fiscal tightening, the effects of floods, high inflation, high energy prices and import controls.

She added that agricultural production is also expected to decline for the “first time in more than 20 years” due to last year’s catastrophic floods.

“Industrial output is also expected to decline due to supply chain disruptions, weakened confidence and higher borrowing costs and fuel prices. Lower activity is expected to spill over into the wholesale trade and transport services sectors, impacting services output growth,” the report said.

It said output growth is expected to gradually recover in fiscal 2024 and 2025, but “remain below potential” as low foreign reserves and import controls continue to limit growth.

He added that poverty in Pakistan will inevitably increase with pressures from weak labor markets and high inflation, warning that further delays in external financing, policy slippage and political uncertainty pose significant risks to the country’s macroeconomic poverty outlook.

Without higher welfare spending, the lower-middle-income poverty rate is expected to rise to 37.2 percent in fiscal year 2023. “Given the dependence of poor households on agriculture and small-scale manufacturing and construction, they remain vulnerable to economic and climate shocks,” the report added.

Lower activity is expected to spill over into the wholesale trade and transport services sectors, impacting services output growth.

With imports subdued, the current account deficit is expected to narrow to 2% of GDP in fiscal 2023, but widen to 2.2% of GDP in fiscal 2025 as import controls are eased.

The fiscal deficit is expected to narrow to 6.7 percent of GDP in fiscal 2023 and beyond over the medium term as fiscal consolidation takes place. The macroeconomic outlook is based on the completion of the IMF-EFF programme, sound macroeconomic policies, continued structural reforms and adequate external financing.

The report states that Pakistan’s economy is under pressure from low foreign reserves and high inflation. Activity has fallen due to tightening policies, flood impacts, import controls, high borrowing and fuel costs, low confidence and lingering political and policy uncertainty. Despite some anticipated recovery, growth is expected to remain below potential over the medium term.

The key risks to the World Bank’s outlook are the non-completion of the IMF program due to political slippage and the failure to materialize the expected funding. Other risks include political instability, deterioration of domestic security and external economic conditions, and financial sector risks associated with revaluation losses, lack of liquidity and high sovereign exposure.

Health and education outcomes are also at risk, as high inflation and reduced incomes could lead poor households to lower school attendance and food intake, the outlook warns.

With strong public consumption, economic growth rose substantially above potential in fiscal 2022 at the cost of rising imbalances that led to pressures on domestic prices, the external and fiscal sectors, the exchange rate and foreign reserves, the World Bank noted.

She added that these imbalances were exacerbated by catastrophic floods in 2022, a sharp rise in global commodity prices, tightening global financing conditions and domestic political uncertainty.

In addition, disruptive policy measures, including a period of exchange rate restrictions and import controls, delayed the IMF’s EDF program and contributed to reduced creditworthiness, lower confidence, high yields, interest payments, and loss of access to international capital markets.

The World Bank noted that in recent developments, official remittance inflows fell by 11.1 percent, partly due to exchange rate restrictions that favored informal non-bank channels.

Any decline in total remittances would reduce the ability of households to cope with economic shocks and increase poverty pressures, the report warns.

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