Lender bases assessment on simulation data; Floods in Punjab deepen rural household losses
World Bank. PHOTO: FILE
ISLAMABAD:
The World Bank claimed on Tuesday that Pakistan’s poverty rate decreased to 22.2% and it would sink further to pre-Covid levels this year, yet reiterating that the country’s current economic growth rate was not enough to reduce poverty and improve the living standard.
The paradoxical statements by the lender underscore the emergent need for the latest credible data, as the World Bank too has assumed the poverty reduction by running a simulation exercise on 2019 consumption data of Pakistan.
The Washington-based lender released its flagship annual ‘Pakistan Development Update’ report, which showed a declining trend in poverty, marking a departure from it’s a month-old statement that the current economic model cannot reduce poverty.
The World Bank on Tuesday also upward adjusted Pakistan’s economic growth forecast to 3% for this fiscal year, which is slightly better than its few days old forecast of 2.7%.
While projecting the poverty rate already declined to 22.2% and to reduce further to 21.5% in this fiscal year, the World Bank economist, Mukhtarul Hasan, also said that the current economic growth rate was “not enough” to improve the living standard and reduce poverty.
Responding to a question by The Express Tribune, Christina Wieser, the bank’s lead poverty expert, refuted that there was any pressure by the government to change the last month’s forecast of poverty going northbound.
Last month, the World Bank had said that “Pakistan’s growth model that supported initial poverty reduction has proven insufficient to sustain progress and poverty is on the rise since 2021-22”.
Wieser clarified that in the absence of the latest consumption data, the World Bank has used some strong assumptions in simulation models, which showed poverty declining. She disclosed that the World Bank had assumed that the increase in sectoral growth is also fully passed on to labour wages.
But this assumption that may not be true as even some government departments are not paying the minimum Rs37,000 per month wage to its daily wage employees and it did not increase the wages in this budget.
Wieser further said that the World Bank will make further adjustments in its poverty estimates once the latest ‘Household Integrated Economic Survey’ data is available in next couple of months.
While presenting the findings here at the World Bank’s local office, Wieser said that higher growth and lower inflation contributed to a decrease in poverty, with the poverty rate, measured at the national poverty line, estimated to have fallen to 22.2% in the last fiscal year from 25.3% of June 2024.
Strong growth in the construction and logistics sectors, which employ around one-quarter of all working poor, boosted labour incomes, said Wieser. However, last month the World Bank said that due to lower wages in the construction sector, the poverty was on the rise in Pakistan.
She said that a sharp drop in food inflation reduced price pressures and improved the purchasing power of the poor, who spend roughly 45% of their household budgets on food. But the report underlined that the floods are anticipated to affect poor and vulnerable rural households, who face the loss of agricultural assets, with limited savings and inadequate coping mechanisms.
These vulnerabilities are compounded by rising food inflation and the volatility of informal jobs in low skill industry and services sectors, according to the report. “As a result, the pace of poverty reduction is expected to slow, with poverty declining only modestly to 21.5% in fiscal year 2026 and to 20.6% in fiscal year 2027.
The report also explicitly stated that since 2019, Pakistan has undergone several major crises, including the Covid-19 pandemic, devastating floods in 2022, and a macroeconomic crisis made more precarious by increased political uncertainty.
It is expected that these shocks had a profound impact on household welfare and poverty rates in the country, but recent survey data is not available to quantify these. In this context, welfare levels for Pakistan can be estimated using a micro-simulation tool which models the path of household welfare based on macroeconomic indicators.
The report added that the underlying assumption for this approach is that macroeconomic indicators, such as sectoral GDP growth, inflation, and changes in the real value of private and public transfers, directly influence households’ real labour and non-labour incomes, which in turn has a direct bearing on consumption levels and poverty.
Bolormaa Amgaabazar, the World Bank’s country head, said that recent floods, have complicated the outlook, imposing significant human costs and economic losses, thereby dampening growth prospects, and posing additional challenges to macroeconomic stability amid constrained fiscal space, high external financing needs, and major regional and global uncertainties.
Budget is vulnerable
The report reflected that meeting the budget targets of economic growth, provincial cash surpluses and budget deficit would not be possible. The budget continues to be predicated on optimistic growth targets and revenues, according to the report. It added that the budget estimates real GDP growth of 4.2% is significantly above World Bank and IMF forecasts.
Increases in provincial surpluses carry risks due to floods, said the lender, adding that the federal budget projects a 45.1% increase in provincial surpluses, a key component of Pakistan’s fiscal consolidation strategy.
This increase hinges on the successful implementation of provincial Agriculture Income Tax (AIT) regimes, effective since January 1, 2025, with tax liabilities for the second half of FY25 expected to be collected in the first quarter of FY26.
Provinces are also expected to strengthen GST collection of services. However, these targets carry significant risks. Provinces will need to curb expenditure growth to maintain surpluses, a task that may prove difficult if revenue performance falls short, said the lender.
The recent floods, particularly in Punjab, threaten agricultural output. Mukhtarul Hasan said that based on the assumption that the flood impacts are limited, fiscal discipline is maintained, and the IMFEFF programme stays on track, economic growth is expected to remain at 3%. A few days ago, the World Bank had cut the economic growth projection to 2.6%.
Inflation & external sector
The flood-related shock to food supply is expected to push inflation above earlier projections, peaking at 7.2% in the current fiscal year, which is slightly higher than the official target.
The current account is projected to return to a small deficit of 0.3% of GDP in this fiscal year as remittances and lower oil prices offset export losses and higher food imports, according to the lender. It said that as post-flood recovery boosts import demand and remittances normalise, the deficit is expected to widen further in the next fiscal year.
The World Bank has sought more visibility in the movement of exchange rate market. It has recommended enabling a deep and liquid interbank market without SBP intermediation and broader participation from market players, including exporters, importers, and foreign investors.
The lender has demanded publishing detailed data on interbank market transactions, including volumes and participants and phasing out ad hoc interventions so that the exchange rate reflects actual supply and demand.
Anna Twum, the bank’s expert on international trade, said that Pakistan’s exports were hardly equal to 0.1% of the global exports, which in the case of India was over 5%. She cautioned that 70% of Pakistan’s exports were at risk due to new standards being introduced by the European Union (EU).
Budget deficit
The lender said that fiscal consolidation is expected to continue under the ongoing IMF programme. However, flood-related relief and reconstruction needs will add to spending pressures, with the fiscal deficit projected to remain elevated at 5.4% of GDP in FY26, which is above the official target.
The World Bank said that public debt is expected to remain elevated to 76% of the GDP due to modest flood related spending and elevated financing needs. The gross financing needs will nevertheless remain high, reflecting maturing short-term debt, repayments to multilateral and bilateral creditors, and upcoming Eurobond maturities, according to the lender.
