WB calls for bold reforms to sustain recovery
• Expects economy to grow by 1.8pc this fiscal, pick up to 2.3pc and 2.7pc in next two years
• Projects inflation to average 26pc this year before falling to 15pc in FY25 and 11.5pc in FY26
ISLAMABAD: Projecting Pakistan’s economy growing by 1.8pc in the ongoing fiscal year, the World Bank on Tuesday warned that the nascent recovery was neither sustainable nor sufficient to address growing poverty (currently at 40pc) unless bold, steadfast and broad-based reforms were implemented on an urgent and sustainable basis.
In its biannual report, Pakistan Development Update (PDU): Fiscal Impact of Federal State-Owned Enterprises, the bank said the SOEs were getting budget support of around 2pc of GDP and responsible for about 18pc of the country’s fiscal deficit and yet the government was practically doing little except a lot of legislative and regulatory work.
“Results have yet to materialise,” even though the process for corporate governance improvement and related activities started in 2013, said Quratulain Hadi, a co-author of the report.
The World Bank also raised questions over the creation of the $8 billion sovereign wealth fund (SWF) of eight leading profitable SOEs in oil and gas and financial sectors, saying these had moved out of the ambit of the SOE Policy and related transparency.
The transfer of these four SOEs — OGDCL, PPL, Government Holdings, and National Bank of Pakistan — “may significantly change the outlook of the SOE portfolio”, it said, adding that these four state-owned firms accounted for 42pc of total profits and 12pc of total assets in the portfolio in 2022.
“The SOEs within the SWF should be classified as commercial SOEs and be governed by the SOE Act and Policy,” the bank demanded.
Alternatively, if the government owns and controls the sovereign wealth fund, it could be designated as a commercial SOE to ensure appropriate oversight and alignment with best corporate governance practices.
“The government should ensure adequate governance arrangements for the SWF to safeguard assets and stakeholders’ interest … (and) plan an annual evaluation of the SWF against its mandate,” the bank said.
Moreover, the government should consider the fund for membership in the International Forum of Sovereign Wealth Funds (IFSWF) and adopt its performance and reporting standards, the bank demanded.
The bank projected the real GDP to grow by 1.8pc this year from a negative 0.2pc last year, moving on to 2.3pc in fiscal 2025 and 2.7pc by fiscal 2026.
The growth is premised on 3pc higher inputs in agriculture, 1.8pc in industry and 1.2pc in the services sector this year unless there is any unseen shock. The World Bank projected inflation to average 26pc this year before falling to 15pc in 2024-25 and 11.5pc in 2025-26.
The fiscal deficit would remain elevated in the World Bank’s projects — a mammoth 8pc of GDP this year, followed by 7.4pc in 2025 and 6.6pc in 2026.
The current account deficit is projected at 0.7pc this year and 0.6pc in the next two fiscal years. There would thus be a nominal decline in debt-to-GDP ratio to 73.1pc this year and 62.3pc next year from a peak of 80.7pc of GDP in fiscal 2023.
Inflation, interest rate decline
Responding to a question about whether declining inflation meant a cut in the policy rate soon, the World Bank’s country director for Pakistan, Najy Benhassine, said that “we should see some positive development” on interest rates but added that a decline in inflation and interest rate was subject to successful fiscal consolidation.
Regarding tough structural reforms, Mr Benhassine said he hoped the prevailing macroeconomic crisis to be Pakistan moment as many other nations had corrected course after such challenges to sail through to sustainable development.
He said the recent moderate pickup in growth was welcome but insufficient to address growing poverty and “a lot more needs to be done to achieve at least 5-6pc growth rate. Difficult reforms needed to contain large fiscal deficits”, he said.
He declined to comment on the prevailing political environment and whether a coalition government could deliver those difficult reforms but added that success stories in other countries were never predicted but were built upon transparency and consistency in reforms that revived business and economic confidence.
To another question, he said models like the Special Investment Facilitation Council (SIFC) were used as a delivery unit in some other countries, including Egypt, to unlock channels for new investments, but these should not be restricted for all other businesses. Such forums could be used to facilitate investment triggers, he said.
The World Bank’s underlying message was that there were moderate and early signs of economic recovery, but these were on the weak foundations.
“Subdued recovery reflects tight monetary and fiscal policy, continued import management measures aimed at preserving scarce foreign reserves, and muted economic activity amid weak confidence,” it said.
“Growth remains insufficient to reduce poverty, with 40pc of Pakistanis now living below the poverty line. Macroeconomic risks remain very high amid a large debt burden and limited foreign exchange reserves,” it pointed out.
“The structural reforms needed to durably improve the economic outlook are known. Developing a clearly articulated reform implementation plan that is ambitious, credible, and shows quick progress is now essential to restoring confidence,” Mr Benhassine said.
Published in Dawn, April 3rd, 2024