World Bank: Pakistan Reduced Poverty and Grew Economy during Covid-19 Pandemic
By Riaz Haq
CA

The News International

Pakistan poverty headcount, as measured at the lower-middle-income class line of US$3.20 PPP 2011 per day, declined from 37% in FY2020 to 34% in FY2021 in spite of the COVID19 pandemic, according to the World Bank's Pakistan Development Update 2022 released this month. The report said Pakistan's real GDP shrank by 1% in FY20, followed by 5.6% growth in FY21.  The report highlights high inflation and low savings rate as key economic issues. 

Pakistan's Macroeconomic Indicators - Source: World Bank

 

The report credits the PTI government led by former  Prime Minister Imran Khan  for timely policy measures, particularly the  Ehsaas program , for mitigating the adverse socioeconomic impacts of the COVID-19 pandemic. Here's an excerpt of the report titled  Pakistan Development Update 2022 : 

"The State Bank of Pakistan (SBP) lowered the policy rate and announced supportive measures for the financial sector to help businesses and the Government expanded the national cash transfer program (Ehsaas) on an emergency basis. These measures contributed to economic growth rebounding to 5.6 percent in FY21.  However, long-standing structural weaknesses of the economy, particularly consumption-led growth, low private investment rates, and weak exports have constrained productivity growth and pose risks to a sustained recovery. Aggregate demand pressures have built up, in part due to previously accommodative fiscal and monetary policies, contributing to double-digit inflation and a sharp rise in the import bill with record-high trade deficits in H1 FY22 (Jul–Dec 2021). These have diminished the real purchasing power of households and weighed on the exchange rate and the country’s limited external buffers." 

The report cites high rates of inflation hurting the people, particularly the poor who spend about half of their income on food. Here's an except: 

"Headline inflation rose to an average of 9.8 percent y-o-y in H1 FY22 from 8.6 percent in H1 FY21, driven by surging global commodity and energy prices and a weaker exchange rate. Similarly, core inflation has been increasing since September 2021. Accordingly, the State Bank of Pakistan (SBP) has been unwinding its expansionary monetary stance since September 2021, raising the policy rate by a cumulative 525 basis points (bps) and banks’ cash reserve requirement by 100 bps" 

 

Pakistan Savings Rate Comparison. Source: World Bank

The World Bank report highlights the low level of personal savings and investments as a key  impediment to economic growth . Here's an excerpt: 

"The savings challenge has only been exacerbated by the low level of  financial inclusion  in the country, where even those who save are not saving with the financial system, and as such savings are not being fully leveraged to support capital formation. Only 21 percent of the population has access to an account and only 18 percent of the population uses digital payments. There are also large gaps in financial inclusion, with vulnerable segments having limited access at high prices. In terms of access to accounts, 7 percent of adult women have access compared to 35 percent of adult men, and 15 percent of young adults (ages 15–24) have access compared to 25 percent of older adults. It should be highlighted, however, that Pakistan has made notable gains on the financial inclusion agenda in recent years, supported by policy reforms and holistic strategies such as the National Financial Inclusion Strategy. However, despite the progress made, Pakistan underperforms on key metrics of financial inclusion in comparison to its peer comparators. Estimates suggest that less than 50 percent of domestic savings find their way to the financial sector, with the rest used in real estate, being intermediated through informal channels, or are soaked up directly by the government through National Savings. The incentive system is skewed such that savings flow outside of the financial sector. The large quantum of currency in circulation (CiC) in the economy is also indicative of this trend. The CiC/M2 ratio, which averaged 22 percent till June 2015 has increased to over 28 percent as of June 2021. The increase in CiC/M2 ratio translates into excess CiC of PKR1.4 trillion. These are resources that could have been intermediated for productive uses by the financial sector but are currently outside the sector." 

(Riaz Haq is a Silicon Valley-based Pakistani-American analyst and writer. He blogs at  www.riazhaq.com )