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Pakistan’s strong post-pandemic recovery came to a halt in FY23 with large accumulated economic imbalances that resulted from the delayed withdrawal of accommodative policy, and a series of domestic and external economic shocks. Pressures on domestic prices, external and fiscal balances, the exchange rate, and foreign exchange reserves mounted amid surging world commodity prices, global monetary tightening, recent catastrophic flooding, and domestic political uncertainty. Confidence and economic activity collapsed due to import controls, periodic exchange rate fixing, creditworthiness downgrades, and ballooning interest payments. Poverty is estimated to have increased due to deteriorating wages and job quality, along with high inflation that eroded purchasing power, particularly for the poor.

Pakistan’s economy is estimated to have contracted in FY23, after two consecutive years of stellar growth. Overall, real gross domestic product (GDP) is estimated to have declined by 0.6 percent in FY23 after growing by 6.1 percent in FY22 and 5.8 percent in FY21. Floods caused heavy damage to crops and livestock, while difficulties securing critical inputs, including fertilizers, further slowed agriculture output growth. With 44 percent of poor workers relying on agriculture, weak agricultural performance had significant poverty impacts. Supply chain disruptions due to import restrictions and flood impacts, high fuel and borrowing costs, political uncertainty, and weak demand affected industry and service sector activity, and dampened private investment. Private consumption also shrank with weakened labor markets and surging inflation. This likely reduced the labor incomes of millions of workers, especially those who moved to lower-productivity informal jobs.

Economic growth is expected to remain sluggish and downside risks to the outlook will remain exceptionally high. The approval of the International Monetary Fund (IMF) Stand-By Arrangement (SBA) in July 2023 unlocked new external financing and averted a balance of payments crisis. Even with the SBA, reserves are expected to remain low, necessitating continued import controls and constraining economic recovery. Real GDP growth is projected to reach only 1.7 percent in FY24 and 2.3 percent in FY25. The agriculture sector is expected to recover on the back of higher production of important crops, including cotton and rice. Marginal easing of import restrictions is expected to support some recovery in the industrial sector, particularly large-scale manufacturing. Flow-on impacts from the strengthening agriculture and industrial sectors will support a revival in associated services sectors including wholesale and retail trade, and transport and storage. However, high inflation due to increasing domestic energy prices and continued depreciation is likely to keep economic activity subdued. Recovery in private investment and exports will be marginal in the absence of broader reforms. With the resumption of growth, poverty expected to decline to 37.2 percent in FY24.

The economic outlook and short-term macroeconomic stability are predicated on the robust implementation of the SBA, continued fiscal restraint and external financing inflows. Financial sector instability and policy slippages due to social tensions pose significant risks. Continued high inflation, localized insecurity, and weak growth increase vulnerability to falling into poverty and worsen the situation of the existing poor. More than 10 million people are currently just above the poverty line, and at risk of becoming classified as poor if the situation deteriorates. Without further reforms, risks will remain exceptionally high, economic activity will remain constrained by import controls and weak confidence, while low investment and exports will undermine medium-term growth potential.

A more robust recovery will require an ambitious medium-term reform agenda focused on fiscal consolidation and enhancing competitiveness, supported by strong political ownership and commitment. The reforms would include measures to increase revenues by broadening the tax base, including from closing exemptions and tapping increased revenue from agriculture, retail, and property. It would also entail measures to rationalize fiscal expenditures, such as by reducing wasteful and regressive subsidy spending, and to restore private sector confidence through business regulatory reform and reforms to state-owned enterprises, and to address inefficiencies and high costs in the energy sector.

Last Updated: Oct 04, 2023


of households are now connected to the water supply


Pakistan: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments
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