World Bank revises Pakistan’s growth forecast to 0.5pc

ISLAMABAD: The economic growth rate for the current fiscal year is forecast to remain at 0.5 percent, said the latest projection by the World Bank.

According to the Global Economic Prospects (GEP) 2021 issued by the World Bank, the recovery in Pakistan is expected to be subdued, with growth at 0.5pc in FY2020-21. Growth is projected to be held back by continued fiscal consolidation pressures and service sector weakness, it added. The government has set a GDP growth target of 2.1 percent for the current fiscal year.

In the medium term, the bank estimated the economic recovery in the country to stay restrained, averaging 1.3 percent over the next two fiscal years — slightly better than expected in June 2020 but below potential growth.

The bank forecasts a 2 percent growth rate for Pakistan in the next fiscal year 2021-22. On the other hand, the South Asia region is projected to grow by 3.3 percent in 2021.

The outlook is predicated on maintaining reform momentum and adherence to a macroeconomic-sustainability framework. The forecast said that limited prospects for a strong rebound in the services sector will aggravate poverty.

The weak growth prospects particularly in the services sector reflect a protracted recovery in incomes and employment, limited credit provisioning constrained by financial sector vulnerabilities, and muted fiscal policy support.

The forecast assumed that a vaccine will be distributed on a large scale in the region starting from the second half of 2021 and that there is no widespread resurgence in infections.

In India, growth is expected to recover to 5.4 percent in 2021, as the rebound from a low base is offset by muted private investment growth due to weakness in the financial sector. In the financial sector, non-performing loans were already high before the pandemic.

In the region excluding India, growth would slow to 0.9 percent in 2021 (on a calendar year basis) instead of 2.1 percent while Afghanistan, Maldives, and Pakistan are likely to see the largest downgrades.

The report said Pakistan’s growth was estimated to have contracted by 1.5 percent in FY2019-20. This reflects the effects of the measure to control COVID-19 as well as the impact of monetary and fiscal tightening.

The World Bank said 6.25 percent reduction in Pakistan’s policy rate moved real interest rates into negative territory. The risk of debt distress is elevated in several economies including Pakistan and requires decisive action to maintain macroeconomic stability.

It said the remittance inflows remained robust in 2020 with double-digit growth in Bangladesh and Pakistan due to the increased use of formal channels to repatriate funds, government incentives, and the return of migrant workers.

These inflows have contributed to the improvement of current accounts and allowed several major regional economies including Pakistan, India and Bangladesh to increase their foreign reserves.

The Debt Service Suspension Initiative (DSSI) in Afghanistan, Maldives, Nepal, and Pakistan from G20 countries has also mitigated External financial vulnerabilities. It said that further policy intervention is needed to minimise risk including greater debt transparency.

It warned that some economies including Pakistan also faced considerable policy and security-related uncertainty. It said the policy needed to implement long-term growth strategies has been eroded by the impact of the pandemic and further increases the risk of financial and sovereign debt crises.