ISLAMABAD: Reducing Pakistan’s economic growth rate forecast for current fiscal year by almost one per cent, the World Bank (WB) on Wednesday said the last ditch energy subsidies by the outgoing government put an additional burden on budget and threaten the International Monetary Fund (IMF) programme.

“The financing of the price cuts or subsidies can create an additional burden on the fiscal budget, threaten the ongoing programme with the IMF, and limit the use of the fiscal budget on other, more productive projects”, said the World Bank ahead of the IMF-WB Annual Spring Meetings beginning early next week.

While launching its latest ‘South Asia Economic Focus Reshaping Norms: A New Way Forward’, the bank’s Chief Economist for South Asia Region Hans Timmer said these subsidies were ‘unsustainable and ineffective’ and advocated that right prices should be charged to consumers and redistributed to poor households.

The bank noted that Pakistan had earlier followed its agreement with the IMF to remove tax exemptions and increase the tax on fuels. However, rising energy prices domestically and challenges from political opposition forced the government to offer electricity and fuel price relief in February. “While these measures can help reduce fluctuations in domestic prices, also constitute a direct burden or hidden liability on the government’s budget, which could increase fiscal vulnerabilities going forward”.

South Asian region faces worsening supply bottlenecks, rising inflation, says report

“GDP growth is expected to slow to 4.3pc in FY22 (against 5.6pc last year) and to 4pc in FY23”.

In January, Pakistan’s GDP growth was put at 5.2pc which has since been changed. This comes amid monetary tightening measures that began in September 2021, high base effects from the previous year, and continued high inflation eroding real private consumption growth,” the bank said.

Talking about the region, the bank said growth in South Asia, already uneven and fragile, will be slower than previously projected, due to the impacts of the war in Ukraine and persistent economic challenges. As such, it projected the region to grow by 6.6pc in 2022 and by 6.3pc in 2023. The forecast for 2022 has been revised downward by one percentage point compared to the January projection.

Countries in South Asia are already grappling with rising commodity prices, supply bottlenecks, and vulnerabilities in financial sectors. The war in Ukraine will amplify these challenges, further contributing to inflation, increasing fiscal deficits, and deteriorating current account balances, said WB Vice President for South Asia Hartwig Schafer.

The bank noted that one of Pakistan’s challenges in the current environment was its energy subsidies, which were the largest in the region. Inflation is expected to rise in all countries in 2022 and reach double digits in Pakistan and Sri Lanka before subsiding in 2023. In Pakistan, high inflation has pushed the real lending rate briefly into negative territory in 2021. But a series of monetary tightening measures lowered inflation expectations, and the real lending rate has been positive since the end of 2021.

On the fiscal side, accumulated government debt in Pakistan during Covid-19 pandemic may lead to fiscal consolidation measures, which can face political resistance. General government debt has reached over 70pc of GDP.

It noted that Pakistan experienced the mildest exports contraction in the region in 2020, and the recovery led by the textile sector was also the most rapid. Pakistani goods exports fell 54pc year-over-year in April 2020 at the height of the pandemic. Since late 2020, the textile sector, which makes up more than 60pc of total goods exports, has led the recovery.

Published in Dawn, April 14th, 2022