The World Bank has estimated major gaps in the targets for debt, fiscal deficit and the external sector, which was agreed to by Pakistan with it being a member of the International Monetary Fund (IMF) and emphasized the need for Islamabad must not abandon its prudent course despite the most devastating flooding since independence.
Biannually, the Pakistan Economic Update of the World Bank suggested that the international lending institutions were not in disposition to make any significant concessions to Islamabad regarding the terms of agreement including the rise in the cost of electricity.
The report indicated that the budget’s primary balance will be negative by 3.3% of the gross domestic product (GDP) in comparison to the goal set by the IMF of 0.2 surplus. This would be the biggest drop. The ratio of GDP to debt will decrease to 71.7 percentage by the close of this fiscal year, which is lower than the previous IMF projection of 68.2 percent.
In addition, the deficit in the current account is estimated to be 4.3 percent of GDP, which is roughly $19 billion from the World Bank, against the IMF’s previous estimation of 2.5 percent, which is a rise in the need for foreign loans in the country.
IMF targets for programmes could undergo significant changes during the coming visit of a fund’s representative scheduled for October 26 until November 4.
Inflation could increase as the fiscal crisis could worsen, and revenues will fall, and the taxes would decrease, according to Derek Chen, senior economist at the World Bank. “We expect fiscal policy to remain expansionary,” said Chen.
The projections have been based in the hope that Pakistan will remain within the IMF program, according to the top economist.
If the Pakistani IMF program is again off course, the figures will continue to decline because of financial and monetary indiscretion.
The World Bank released the report on the same morning of the Moody’s credit ratings agency rattled Pakistan with a an unfavorable score of Caa1, a bit over the its default rating.
Caa1 rating indicates that Pakistan’s debt has been “judged to be of poor standing and is subject to very high credit risk”.
The Ministry of Finance has strongly opposed the rating decision and claimed that it was implemented unilaterally, with no prior consultations or meetings with the teams of officials from the Ministry of Finance and the State Bank of Pakistan.
Moody’s “worsening near- and medium-term economic outlook” doesn’t not reflect the true picture because of gaps in the data available to the rating agency as well as the use of estimates are not based on fundamentals, the agency said.
The bank predicted that the sector of agriculture would shrink by 1.1 percent this year compared to the growth rate of 3.9 percent. The industrial sector could increase by 2.3 percent, however it is lower than the goal of 5.9 percent. The services sector is expected to expand by 3.2 percent against the forecast of 5.1 percent.
The Pakistani economy is facing significant dangers from a possible increase in global energy and food prices because of the ongoing conflict between Russia and Ukraine as well as slower growth in the global economy due to the rise in inflation, said the lender.
To deal with short-term risk, the government must strike an appropriate balance between working on the necessary fiscal consolidation as well as meeting the needs of recovery and relief as well, the report added.
“Because of the catastrophic floods, there is more urgency to implement reforms for creating fiscal space for reconstruction,” said Najy Benhassine Director for Country Affairs at the World Bank.
The bank stated that the significant external and domestic funding demands, continuing political uncertainties as well as upcoming elections and maintaining market confidence will be crucial.
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“It is very important for the government to show to markets that it has an economic recovery plan,” said Tobias Akhtar Haque, World Bank Lead Economist. He added that it was crucial to ensure that the IMF program was on the right course.
Despite the difficult circumstances however, the bank stated that it was crucial to keep a tight policy of monetary policy, and seek to achieve fiscal consolidation to the greatest extent feasible, which includes targeted and precise priority setting of any new spending, and also to implement the planned structural reforms, which include those in the sector of energy.
However, these measures could result in Pakistan’s economic growth will continue to slow the rate of unemployment, poverty, and inflation will continue to go up.
The bank noted that, with WPI inflation rate exceeding CPI inflation by about 50 percent, the monthly and annually CPI inflation has not yet reached its reach its peak.
“Overall, due to higher domestic energy prices, flood disruptions and the weaker rupee, the CPI inflation is projected to rise to an average of 23% in fiscal year 2023, double than the target of 11.5%.”
It also said that the implementation of plans by the government for fiscal consolidation is likely to be more difficult due to the huge need for relief and recovery expenditures as well as slower growth of tax bases due to less economic activity.