Pakistan's Economic Recovery Shows Promise but Challenges Persist: World Bank Report

Despite this stabilization following the recent economic crisis, the report warns that the current growth rate is insufficient to significantly reduce poverty, which rose from 40.2% in FY23 to 40.5% in FY24.

Pakistan’s economy is on a path to recovery, with growth rebounding to 2.5% for the fiscal year ending June 2024, according to the latest World Bank country economic update. Despite this stabilization following the recent economic crisis, the report warns that the current growth rate is insufficient to significantly reduce poverty, which rose from 40.2% in FY23 to 40.5% in FY24.

Key Findings from the Pakistan Development Update

Released today, the Pakistan Development Update: The Dynamics of Power Sector Distribution Reform highlights that after experiencing a recession in FY23, economic activity strengthened in FY24. Contributing factors include robust agricultural output, lower inflation, prudent macroeconomic measures, and decreased political uncertainty.

However, Najy Benhassine, World Bank Country Director for Pakistan, emphasized the necessity for ongoing structural reforms to sustain and enhance this recovery. Key recommendations include:

Reforming the current inequitable and distortive tax system.

Reducing inefficient expenditures and untargeted subsidies.

Lessening the state’s substantial presence in the economy.

Lowering trade and investment barriers.

Addressing the challenges faced by the energy sector.

“Implementation of planned structural policy reforms supported by a strong national political consensus and increased private sector participation is critical to mitigate risks, support stronger private-led growth, and reduce poverty,” Benhassine stated.

Economic Challenges Ahead

Despite the positive signs of recovery, the report identifies ongoing macroeconomic risks, including high financing needs, modest foreign exchange reserves, significant debt, and challenges within the power sector that continue to affect public finances.

Mukhtar ul Hasan, the lead author of the report, forecasts that while recovery is expected to continue, real GDP growth could reach 2.8% in FY25. However, growth is anticipated to remain below potential in the medium term due to tight macroeconomic policies, elevated inflation, and persistent policy uncertainty. "Faster growth will be needed to support significant improvements in living standards," Hasan added.

Focus on the Power Sector

This edition of the Pakistan Development Update places particular emphasis on the challenges within the power sector, presenting a roadmap for addressing these issues through private sector involvement.

Waqas Idrees, co-author of the report, noted, “Private sector participation in the power distribution sector offers the potential for better customer service, reduced losses, improved management, increased efficiency, and new investment, but good outcomes are contingent on conducive government policies, strong political ownership, and robust private sector engagement.”

The Pakistan Development Update is published biannually and serves as a companion to the South Asia Development Update, which analyzes economic developments and policy challenges in the region. The October 2024 edition, titled Women, Jobs, and Growth, will explore economic growth projections and the crucial role of increased female labor force participation and trade openness in unlocking the region’s untapped economic potential.

As Pakistan continues its economic stabilization journey, addressing structural challenges and enhancing private sector participation will be essential for fostering sustainable growth and improving living standards across the nation.