The World Bank recommends a “bold economic reform plan” for recovery. What is new?

In a recent report released on Tuesday, the World Bank has underscored the critical importance of Pakistan implementing an ambitious and clearly communicated economic reform plan to foster robust recovery and alleviate poverty in the country.

According to the latest Pakistan Development Update by the World Bank, Pakistan’s economy is projected to grow by a modest 1.8 % in the current fiscal year ending June 2024. The growth rate is significantly lesser than Pakistan’s monetary policy projections which predicts a growth of almost 3%. 

The subdued recovery is attributed to tight monetary and fiscal policies, continued import management measures to preserve foreign reserves, and overall weak economic activity amid low confidence levels.

The report hints that while the economy has shown signs of improvement in the first half of the fiscal year, particularly in the agricultural sector, growth remains insufficient to uplift the lives of the population, with 40 % of Pakistanis still living below the poverty line. Macroeconomic risks persist due to a heavy debt burden and limited foreign exchange reserves.

Najy Benhassine, World Bank Country Director for Pakistan, emphasised the urgent need for structural reforms to enhance economic prospects. He stated, “Developing a clearly articulated reform implementation plan that is ambitious, credible, and shows quick progress is now essential to restore confidence.”

The report also highlights the importance of better fiscal management to address inflation, narrow the current account deficit, stabilise the financial sector, and boost credit to the private sector, all of which are crucial for a robust economic recovery.

To achieve sustained medium-term growth, the report recommends a prudent macroeconomic policy mix alongside reforms to enhance expenditure quality, broaden the tax base, reduce regulatory barriers for private sector activity, decrease state intervention in the economy, address energy sector challenges, and increase public investments in human development.

Key reforms in ten priority areas have been outlined in the report to initiate a strong and poverty-reducing economic growth recovery.

Sayed Murtaza Muzaffari, lead author of the report, cautioned about the risks to the economic outlook, including uncertainties in policy commitments. He also pointed towards financial sector vulnerabilities, and external factors such as geopolitical conflicts and global economic conditions that could add layers of difficulty for Pakistan.

Furthermore, the report highlights the significant fiscal burden posed by state-owned enterprises (SOEs) operating in critical sectors of the economy. These SOEs have consistently incurred losses since 2016, necessitating substantial government support through subsidies, loans, and grants.

In light of this, the report recommends expediting government plans for SOE privatisation, restructuring, and divestment. It also advocates for establishing new guarantee issuance rules, enhancing financial transparency, and promoting good corporate governance practices. In the backdrop of PIA being auctioned the recommendation on SOEs has been well-received by the government.

The Pakistan Development Update serves as a companion piece to the South Asia Development Update, offering insights into economic developments and policy challenges in the region. As Pakistan navigates its economic recovery journey, implementing comprehensive reforms will be crucial for fostering sustainable growth and reducing poverty levels in the country.

While the World Bank report does not present any recommendations that are new under the sun, the implementation upon these recommendations has posed challenges to Pakistan in the past. The briefing on the report also addressed the pain points in reforming the energy sector or controlling inflation through fiscal actions, something that the current government has to take a stance on.