KARACHI: The World Bank has raised alarm bells by stating that heightened uncertainty due to elections in Pakistan could dampen activity in the private sector, including foreign investment.
If combined with political or social unrest and elevated violence, this could further disrupt and weaken economic growth. Meanwhile, weak confidence stemming from political turmoil will contribute to the slow growth in private demand.
The lender explained in its “Global Economic Prospects — January 2024” report released on Wednesday that as inflationary pressure eases in Pakistan, growth is expected to pick up to 2.4 percent in FY2024/25.
In Pakistan, economic output contracted an estimated 0.2 percent in FY2022/23 as a result of the effects of damage from the 2022 floods and increased political uncertainty. Consumer price inflation remained elevated, partly reflecting currency depreciation in early 2023.
However, by late 2023, the rupee showed signs of stabilization, driven by a variety of factors. These included increased liquidity in the foreign exchange market due to tighter enforcement of regulations, a shrinking money supply, a balance of payments surplus on account of low import demand, and a moratorium on Chinese debt repayments.
The World Bank has projected Pakistan’s economic outlook for FY2023/24 (July 2023 to June 2024) to remain subdued, with growth projected at only 1.7 percent. Monetary policy is expected to remain tight to contain inflation, while fiscal policy is also set to be contractionary, reflecting pressures from high debt-service payments.
At present, as poorer households spend more on food, the World Bank warned that rising food prices would disproportionately affect the poor and the vulnerable, resulting in an increase in poverty and inequality.
The risk is particularly high in countries with limited fiscal buffers to mitigate adverse effects, including Nepal and Pakistan, and in countries under major security threats, including Afghanistan. In addition, an increase in food insecurity could be exacerbated by the escalation of the ongoing conflict in the Middle East.
External and fiscal financing needs are elevated in several SAR economies, including Maldives, Pakistan, and Sri Lanka, increasing vulnerabilities to financial market disruptions. In these economies, market sentiment can suddenly shift in response to financial sector stress or weakening fiscal positions. Vulnerability to such shifts is particularly high in countries with limited international reserves or fiscal buffers, or weak governance in the financial sector.
Interest payments are projected to be large in countries with elevated debt levels, including India, Pakistan, and Sri Lanka.
In countries like Bangladesh, Bhutan, India, Maldives, and Pakistan), parliamentary or national assembly elections are scheduled or planned in 2024. The heightened uncertainty around these elections could dampen activity in the private sector, including foreign investment. If combined with political or social unrest and elevated violence, this could further disrupt and weaken economic growth.
In addition, particularly in countries with weak fiscal positions, an increase in spending prior to these elections could exacerbate macro-fiscal vulnerabilities. However, the implementation of policies to reduce uncertainty and strengthen growth potential after elections could lead to an improvement in prospects.
