ISLAMABAD: Forecas­ting Pakistan’s economic growth rate at 2 per cent this year, the World Bank on Thursday warned that 2.5 to 4pc of the population or about 10 million people could fall below the poverty line owing to the combined impact of devastating floods and historic inflation.

In such a situation, the World Bank opposed any profligacy and advocated that long-standing reforms had now become all the more important for the country’s fiscal sustainability after floods and Covid-19. “Because of the catastrophic floods, there is more urgency to implement reforms for creating fiscal space for reconstruction,” said Najy Benhassine, the World Bank Country Director for Pakistan at the launch of World Bank’s October 2022 Pakistan Development Update: Inflation and the Poor.

This showed that international lending agencies are in no mood to relax ongoing IMF programme conditions to achieve macroeconomic stability through focused structural reforms.

The World Bank’s senior economist Derek H. C Chen said inflation was estimated to spike further, the fiscal situation to worsen and revenues come down and as a result tax base will shrink, adding he expected the fiscal policy to remain expansionary. He warned that the government should respond to extensive relief and recovery needs but at the same time also focus on fiscal sustainability by cooling off the economy.

Bank calls for implementing reforms to generate funds for reconstruction

Lead Economist Tobias Akhtar Haque also insisted that it was very important for the government to show to the markets that it had an economic recovery plan and “it is absolutely critical that the IMF programme rem­ains on track”, he added.

Household shocks

Mr Najy said the bank was envisaging financing of about $2bn to support emergency operations to quickly start the reconstruction and rehabilitation of infrastructure, housing and restore livelihoods, and to help strengthen Pakistan’s resilience to climate-related risks. He said $300 to $500 million funds were being repurposed in its existing portfolio. In parallel, the board will be requested early approval from International Development Assistance and expect disbursement before Decem­ber this year.

The bank said the devastating floods will have an adverse impact on poverty. The immediate impact on household welfare will come through at least four channels. These include loss of household income due to destroyed harvest, killed livestock, or inactivity of businesses, followed by loss of assets like homes, livestock, productive equipment, and household durables, shortage of food due to lost stocks, poor harvests and rising prices and on top of that loss of human capital, given significant threat of disease outbreaks and food shortages, and prolonged school closures, with attendant learning losses.

“Preliminary estimates suggest that as a direct consequence of the floods, the national poverty rate could increase by 2.5 to 4.0 percentage points, pushing between 5.8 and 9 million people into poverty”, the bank said, adding the size and duration of shocks will vary across locations and households depending on the intensity of the flooding as well as the quality of relief and reconstruction efforts. Even in the best case, reversing these negative shocks to household welfare will take considerable time, and some losses, such as losses to human capital and loss of land productivity could set in motion more sustained declines in welfare and will need specific policy attention.

It said the economic outlook had deteriorated with the floods and real GDP growth was expected to slow from 6pc in FY22 to around 2pc in FY23, on high-base effects, flood-related damages and disruptions, a tight monetary stance, high inflation, and a less conducive global environment.

Agriculture shrinks

The bank said the preliminary damage estimates suggest that the agriculture sector contracted for the first time in more than two decades, with flood losses to cotton, date, wheat, and rice crops. More than a million livestock are estimated to have perished. Furth­ermore, damages in the agricultural sector are expected to have spillover effects on the industry and services sectors.

Flood-related cotton losses are expected to weigh on the domestic textile industry, as local cotton constitutes about half of the industry’s required cotton input. Lower agricultural and industrial activity is likely to weigh on wholesale and transportation services activities, which account for 50pc of the service sector output.

Published in Dawn, October 7th, 2022