Pakistan’s economy on edge of precipice, warns World Bank

By Khaleeq Kiani
Published in Dawn on September 23, 2023

ISLAMABAD: Pakistan is in its tipping point crisis where it should decide to remain a laggard with 40 per cent population living below the poverty line under elite capture and policy decisions driven by strong vested interests of military, political and business leaders or change course to take off for a brighter future.

This candid warning came from the World Bank ahead of the new election cycle for the upcoming government to make early choices while making it clear that international lenders and development partners could only advise with international experiences of successes and some financing but hard choices and course correcting decisions could only be taken within the country.

The good sign, however, is that the countries with higher sustainable economic growth like India, Indonesia and Vietnam also made the right decisions at the time of crisis and were able to overcome similar challenges. “This may be Pakistan’s moment in making policy shifts,” said Najy Benhassine, Country Director for the World Bank in Pakistan, at a news briefing while releasing a set of policy notes for debate and discussions for finalisation before the new elected government comes in.

He said Pakistan was in the middle of a human resource capital and economic crisis. “Policy decisions are heavily influenced by strong vested interests, including those of military, political and business leaders,” reads an overview of the Reforms For a Brighter Future: Time to Decide“ that Mr Benhassine released. He said Pakistan had been facing numerous economic hardships including inflation, rising electricity prices, severe climate shocks, and insufficient public resources to finance development and climate adaptation — when the country was among the most vulnerable to climate change impacts.

Says current model can’t reduce poverty as Pakistan has lowest per capita income in South Asia and highest out-of-school kids in the world

“It is also facing a ‘silent’ human capital crisis: abnormally high child stunting rates, low learning outcomes, and high child mortality,” Mr Najy said, adding that Pakistan’s economic model no longer reducing poverty and it was very concerning that poverty reduction successes until 2018 had been reversed since.

Another World Bank official said Pakistan’s poverty rate for the middle-income line of $3.20 per day had declined to 34.3pc by 2018 from 73.5pc two decades earlier but had since increased to 39.4pc according to the bank estimates. Also, over 12.5 million people had additionally fallen below the poverty line measures by $3.65 per day income.

The bank said Pakistan’s average real per capita growth rate was just 1.7pc between 2000 and 2020 — less than half the average per capita growth rate (4pc) for South Asian countries over the period and well below the average of comparator countries with similar economic structures. As a result, Pakistan’s per capita incomes have fallen behind. “While Pakistan’s per capita income was among the highest in South Asia during the 1980s, it is now among the lowest in the region.”

Pakistan’s human development outcomes lag well behind the rest of South Asia and are roughly equivalent to those in many Su-Saharan African countries with the costs disproportionately borne by girls and women while close to 40pc of children under five years of age were stunted and had the largest number (20.3m) of out-of-school children in the world. Its growth model has resulted in periodic balance of payments crises driven by unsustainable fiscal and current account deficits that necessitated subsequent painful contractionary adjustments, slowing growth, reducing certainty and undermining investments.

The bank proposed enhancing revenue mobilisation potential at 22pc of GDP against the existing rate of 9-10pc and said about 3pc of GDP could be immediately recovered by properly taxing properties and agriculture which could contribute 2pc and 1pc of GDP respectively. Simultaneously, expenditures could be reduced through reforms by 1.3pc immediately and about 2.1pc over the medium term and the funds so generated should be utilised in health, education and sanitisation outcomes.

Mr Najy said the heavy government reliance on bank borrowing at high interest rates for deficit financing was also one of the key factors behind high inflation and should be arrested by reducing the government footprint in public sector entities that account for over 45pc of GDP, most of them loss-making and needing public money to stay afloat.

The World Bank proposed shifting policies from underfunded, inefficient, and fragmented service delivery and social protection systems towards coordinated, efficient, and adequately financed service delivery, targeting the most vulnerable — in particular, to reduce abnormally high child stunting rates and to increase learning outcomes for all children, especially for girls.

It also advised a shift from wasteful and rigid public expenditures benefiting a few, towards tightly prioritised spending on public services, infrastructure, and investments in climate adaptation, benefiting populations most in need.

Mr Najy responding to a question on a common charter of economy among the political parties said while such a way forward could be welcome there was reasonable consensus on priorities and challenges among all stakeholders. These policy shifts with wider stakeholder support should be implemented by the new government in the first year in office for a base to build upon in subsequent years.

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