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Overview

Over the past two decades, Pakistan has achieved significant poverty reduction, but human development outcomes have lagged while economic growth has remained volatile and slow. Expansion of off-farm economic opportunities, and the increase in migration and associated remittances allowed over 47 million Pakistanis to escape poverty between 2001 and 2018. Despite rapid poverty reduction, human capital outcomes have remained poor and stagnant, with high levels of stunting at 38 percent and learning poverty at 75 percent. Reflecting a growth model based on private and government consumption, with productivity-enhancing investment and exports contributing relatively limited, Pakistan has experienced frequent macroeconomic crises. Growth of per capita gross domestic product (GDP) has been low, averaging only around 2.1 percent annually over 2000-18. The COVID-19 pandemic has also had serious impacts on human development outcomes and economic growth.

In early FY23, Pakistan’s economy was undergoing an overdue adjustment, as it recovered from the impacts of COVID-19. Supported by accommodative macroeconomic policies, the economy expanded by 6.0 percent in FY22. Strong domestic demand, coupled with low productivity growth, high world commodity prices, and the global economic slowdown contributed to severe external imbalances. To stabilize the economy, the Government began implementing a range of policies to constrain aggregate demand, including a contractionary budget and increases in administered energy prices. As a result of stabilization measures, growth was expected to slow, the exchange rate was expected to stabilize, total public debt was expected to decline gradually from current high levels, while foreign exchange reserves were expected to slowly accumulate.

Recent floods have had enormous human and economic impacts. Pakistan has been experiencing heavy monsoon rains since June 2022 leading to catastrophic and unprecedented flooding. Almost 15% of the country is underwater and just over 33 million people are affected. More than 2 million houses have been damaged or destroyed. Loss of life has also been considerable with 1,700 fatalities reported to date. Loss of livestock is also significant with more than 1.1 million animals estimated to have perished, while over 25,000 animal shelters have been damaged. More than 13,000 km of roads are reported to have been affected and 440 bridges have been damaged or destroyed, with these numbers expected to rise. Economic impacts are concentrated in the agricultural sector, with over 9.4 million acres of cultivated land destroyed, resulting in significant losses to cotton, date, wheat, and rice crops. Lower agriculture output is expected to negatively impact industrial and services sector activity, especially given textile sector reliance on cotton (textiles account for around 25 percent of industrial output). Flooding will impose a lingering drag on output through infrastructure damage, disruption to crop cycles, possible financial sector impacts (microfinance institutions report major solvency problems), and loss of human capital. Preliminary estimates suggest that as a direct consequence of the flood, the national poverty rate will increase by 2.5 to 4.0 percentage points, pushing between 5.8 and 9.0 million people into poverty.

The economic impacts of flooding is likely to delay much-needed economic adjustment. Growth is now expected to reach only around 2 percent in FY23. Due to higher energy prices, the weaker Rupee, and flood-related disruptions to agricultural production, inflation is projected to rise to around 23 percent in FY23.  With disruptions to exports (especially textiles) and higher import needs (food and cotton), the current account deficit is expected to narrow only slightly to around 4.3 percent of GDP in FY23 (from 4.6 percent in FY22). The fiscal deficit (including grants) is projected to narrow only modestly to around 6.9 percent of GDP in FY23 (relative to a budgeted deficit of 4.7 percent), reflecting both negative revenue impacts from flooding and increased expenditure needs.

The Government faces a difficult policy challenge in supporting relief and recovery while maintaining progress towards macroeconomic stabilization. Significant downside risks include: i) unexpected damages from the floods as on-the-ground damage assessments continue ii) political instability which may undermine a coherent and timely policy response; iii) worsening external conditions, including unforeseen increases in global commodity prices and interest rates; and iv) risks associated with large domestic and external financing needs, especially in the context banking sector liquidity constraints. To manage these risks, it will be critical to adhere to sound overall economic management and buttress market sentiment, including through articulating and effectively implementing a clear strategy for economic recovery; constraining fiscal expenditures to the extent possible and carefully targeting any new expenditures; maintaining a tight monetary stance and flexible exchange rate; and remaining on-track with critical structural reforms, including in the energy sector.

Last Updated: Oct 07, 2022

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families qualified for Benazir Income Support Program benefits through the Poverty Score Card survey

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

*Amounts include IBRD and IDA commitments
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20-A Shahrah-e-Jamhuriat
G-5/1, Islamabad
(+92-51) 9090000