It appears the PTI government managed to deliver another punch to the economy on its way out, as the World Bank reduced Pakistan’s growth forecast by almost one per cent and criticised the additional budgetary burden of fuel and electricity subsidies, noting that these also threatened to derail the International Monetary Fund loan programme.
Apart from being a drain on the exchequer, the bank noted, the money being spent on these “unsustainable and ineffective” subsidies could instead have been put to use on “more productive projects” that would stimulate the economy or provide more societal benefits. One of the options suggested was increased income support for the poor — subsidies across the board mean lower prices for the rich and poor alike, whereas using the same funds for income support would reduce the impact of inflation on the poor and also stimulate the economy as poor people are more likely to productively spend the extra money. On the same note, the World Bank report directly attributed fuel and electricity price cuts to political considerations, rather than economic ones.
The decline in the growth rate projection was attributed to high inflation and the related ineffective policy measures taken to control it, which have only been “eroding real private consumption growth”. However, it was not all the government’s fault — the bank noted that the entire South Asia region is in a fragile situation, and that global supply chain issues and the war in Ukraine are taking a severe toll on the global economy. Still, growth in the region is projected to be well over six per cent for each of the next two years — well above the most recent projections for Pakistan. Meanwhile, inflation is likely to remain in double digits till next year. The only other regional country with a similar inflation rate prediction is Sri Lanka, which recently defaulted.
Meanwhile, general government debt has crossed 70 per cent of GDP, partly because of Covid-19 pandemic-related spending. Intense political wrangling can be expected when fiscal consolidation measures are charted out to deal with this additional debt, and given the patchwork nature of the new government, there is legitimate concern that politicking over debt management could lead to further economic upheaval.
Published in The Express Tribune, April 18th, 2022.