Zohra Jabin
Early in FY23, Pakistan’s economy was going through a long-overdue adjustment as it recovered from COVID-19’s effects. The economy grew by 6.0 percent in FY22 thanks to accommodating macroeconomic measures. Severe external imbalances were a result of strong local demand, weak productivity development, high global commodity prices, and the global economic slump. The government started enacting several policies to limit aggregate demand to stabilise the economy, including a contractionary budget and hikes in administered energy prices. Growth was predicted to decrease as a result of stabilisation efforts, and the exchange rate, total public debt, and foreign currency reserves were predicted to all progressively drop from their current high levels. Recent floods have had a huge negative impact on both people and the economy. Since June 2022, Pakistan has been suffering intense monsoon rains, which have caused catastrophic and unheard-of floods. Over 33 million people are impacted and over 15% of the nation is submerged. Over 2 million homes have been destroyed or damaged. 1,700 fatalities have been documented yet, which is a significant loss of life. More than 1.1 million animals are expected to have died from livestock losses, and over 25,000 animal shelters have suffered damage. More than 13,000 kilometres of highways are estimated to have been impacted, and 440 bridges have reportedly been demolished or damaged. Due to the destruction of nearly 9.4 million acres of arable land, which has a disproportionately negative economic impact on agriculture, major losses in cotton, date, wheat, and rice harvests have occurred. Reduced agricultural output is anticipated to have a detrimental impact on the manufacturing and services sectors, particularly considering the reliance of the textile industry on cotton (textiles account for around 25 percent of industrial output). Flooding will have a long-lasting negative impact on production due to infrastructure damage, agricultural cycle disruption, potential financial sector effects (microfinance institutions have serious solvency issues), and loss of human capital. According to preliminary projections, the flood would directly cause a 2.5–4.0 percentage point rise in the nation’s poverty rate, which will result in between 5.8 and 9.0 million more people living in poverty. Flooding’s economic effects will probably postpone a necessary economic adjustment. Growth in FY23 is now predicted to be only about 2%. Inflation is anticipated to increase to almost 23 percent in FY23 as a result of increasing energy costs, a weaker Rupee, and agricultural output delays brought on by floods. The current account deficit is predicted to decrease only marginally to about 4.3 percent of GDP in FY23 as a result of interruptions to exports (particularly textiles) and rising import requirements (food and cotton) (from 4.6 percent in FY22). According to projections, the fiscal deficit (including grants) would only slightly decrease to about 6.9 percent of GDP in FY23 (compared to a budgeted deficit of 4.7 percent), indicating both the adverse effects of floods on revenue and the need for higher spending. 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. To assist relief and recovery while continuing its progress toward macroeconomic stabilisation, the government has a challenging policy task. Important hazards include: I unanticipated flood damage as on-the-ground damage assessments continue Iii) worsening external conditions, such as unanticipated rises in global commodity prices and interest rates; iv) risks associated with significant domestic and external financing needs, particularly in the context of banking sector liquidity constraints; and v) political instability, which may undermine a cogent and timely policy response.It will be crucial to maintain sound overall economic management and support market sentiment to manage these risks. This includes formulating and successfully implementing a clear economic recovery strategy, limiting fiscal spending to the greatest extent possible, carefully focusing any new spending, maintaining a tight monetary stance and flexible exchange rate, and continuing with crucial structural reforms, such as those in the energy sector.
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