- The World Bank report expects the GDP growth rate to reach 2.8% in Pakistan.
- Business confidence is likely to improve after the credit rating upgrade.
- Pakistan’s lack of trade openness is hurting exports, the report says.
ISLAMABAD: In its report titled “Pakistan’s Development Modernization: Dynamics of Power Sector Distribution Reform,” the World Bank identified the IMF programme, external financing and rising electricity tariffs as some of the key challenges faced by the Pakistani economy.
The bank therefore warned that Pakistan’s macroeconomic outlook is highly dependent on the continuation of the Washington-based lender’s program and securing additional external financing.
In its report released on Friday, the financial institution projected a GDP growth rate of 2.8% for Pakistan, below the government’s official target of 3.5%.
He stated in his forecasts that the average inflation rate is 11.1%, the current account deficit is 0.6% of GDP, and a fiscal deficit that will rise to 7.6% of GDP due to increased interest payments. Public debt is expected to reach 73.8% of GDP for the current fiscal year 2024-2025.
The World Bank noted that Pakistan’s lack of trade openness is hurting exports significantly, with an export gap of $60 billion. Specifically, Pakistan’s export gap with China is $13 billion, while the gap with the United States is $6 billion.
“Policy uncertainty poses downside risks to the FY2025 and FY2026 outlook. Macroeconomic prospects depend on effective implementation of the new IMF-EFF programme, fiscal restraint,” the World Bank said in its Pakistan Development Update report, which was released. Expected renewals, new external financing, and the absence of major policy disruptions or external shocks on Thursday.
In the energy sector, a World Bank expert highlighted that electricity tariffs in Pakistan are higher – ranging from 4.7 cents to 6.8 cents per kilowatt-hour – compared to other South Asian countries such as India. The report also revealed that Pakistan’s poverty rate stands at 40.5% this fiscal year, which is slightly higher than last year’s rate of 40.2%.
Economists at the World Bank warned that the expected growth rate of 2.8% is insufficient to significantly reduce poverty or unemployment. With 3.6 million newcomers expected to enter the labor market over the next two fiscal years, this growth rate will not create enough job opportunities to absorb them. However, the bank also expected that lower inflation could lead to further cuts in the interest rate, which has already been cut by 450 basis points.
Under these assumptions, the World Bank expects Pakistan’s economic recovery to continue, with GDP growth reaching 2.8% in fiscal year 2025, driven by lifting restrictions on imports and lower inflation. Business confidence is expected to improve following recent credit rating upgrades, the continuation of the IMF-EFF programme, reduced political uncertainty, and the implementation of fiscal reforms such as shifting constitutionally mandated expenditures to the provinces.
Even with these improvements, the World Bank expects output growth to remain below potential, reaching 3.2% in fiscal 2026, as the economy continues to face tight macroeconomic policies, high inflation, policy uncertainty, and unresolved structural challenges. .
Inflation is expected to slow to 11.1% on average in FY2025 and 9.0% in FY2026 due to lower commodity prices and tightening fiscal policies. However, inflation is expected to remain high in the short term due to rising domestic energy prices, expansive open market operations, and new tax measures.
The State Bank of Pakistan has already cut interest rates, with cuts of 150 basis points in June, 100 basis points in July, and another 200 basis points in September, bringing the interest rate down to 17.5% from its peak. 22%. Further interest rate cuts are expected as inflation continues to moderate.
The report highlighted that the energy sector poses significant risks to financial sustainability and economic growth in Pakistan. Despite improvements in generation capacities, power distribution companies (discos) continue to suffer from significant losses and poor financial performance, which contributes to high electricity costs.