Poverty reduction, but no rise in living standards: WB

The World Bank claimed on Tuesday that Pakistan’s poverty rate fell to 22.2 percent and will sink further to pre-Covid levels this year, but reiterated that the country’s current rate of economic growth was not enough to reduce poverty and improve living standards.

The lender’s paradoxical statements underscore the urgent need for the latest reliable data, as the World Bank has assumed poverty reduction by running a simulation exercise on Pakistan’s 2019 consumption data.

The Washington-based lender released its annual Pakistan Development Update report, which showed a downward trend in poverty, marking a departure from its statement months ago that the current economic model cannot reduce poverty.

The World Bank also on Tuesday revised upward its forecast for Pakistan’s economic growth to 3 percent this fiscal year, slightly better than its forecast a few days ago for 2.7 percent.

While predicting that the poverty rate has already fallen to 22.2 percent and will fall further to 21.5 percent this fiscal year, World Bank economist Mukhtarul Hasan also said the current rate of economic growth is “not enough” to improve living standards and reduce poverty.

Responding to a question from The Express Tribune, Christina Wieser, the bank’s chief poverty expert, denied that there was any pressure from the government to change last month’s poverty forecast northwards.

Last month, the World Bank had said that “Pakistan’s development model that supported initial poverty reduction has proven insufficient to sustain progress and poverty is on the rise from 2021-2022.”

Wieser explained that in the absence of the latest consumption data, the World Bank used some strong assumptions in simulation models, which showed that poverty is falling. He revealed that the World Bank had assumed that the increase in sectoral growth was also fully passed on to labor wages.

But this assumption may not be true as even some government departments do not pay the minimum salary of Rs 37,000 per month to its daily wage employees and it did not increase the salaries in this budget.

Wieser further said that the World Bank will make further adjustments to its poverty estimates once the latest “Comprehensive Household Economic Survey” data are available in the next two months.

Presenting the findings here at the World Bank’s local office, Wieser said higher growth and lower inflation have helped reduce poverty, with the poverty rate, measured at the national poverty line, estimated to have fallen to 22.2 percent in the last financial year from 25.3 percent in June 2024.

Strong growth in the construction and logistics sectors, which employ about a quarter of all working poor, boosted labor incomes, Wieser said. However, last month the World Bank said that due to lower wages in the construction sector, poverty was increasing in Pakistan.

He said the sharp fall in food inflation has eased price pressures and improved the purchasing power of the poor, who spend about 45 percent of their household budgets on food. However, the report highlighted that floods are expected to affect poor and vulnerable rural households, who face loss of agricultural assets, with limited savings and inadequate coping mechanisms.

These vulnerabilities are exacerbated by rising food inflation and the instability of informal jobs in low-skilled manufacturing and service sectors, according to the report. “As a result, the pace of poverty reduction is expected to slow, with poverty falling only modestly to 21.5% in FY2026 and 20.6% in FY2027.

The report also specifically stated that since 2019, Pakistan has experienced several major crises, including the Covid-19 pandemic, devastating floods in 2022, and a macroeconomic crisis made more precarious by heightened political uncertainty.

These shocks are expected to have had a profound impact on household wealth and poverty rates in the country, but no recent research evidence is available to quantify them. In this context, welfare levels for Pakistan can be estimated using a microsimulation tool that models the trajectory of household welfare based on macroeconomic indicators.

The report adds 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 affect real household labor and non-labor incomes, which in turn are directly related to consumption levels and poverty.

Bolormaa Amgaabazar, head of the World Bank, said recent floods have complicated the outlook, imposing significant human costs and economic losses, thereby limiting growth prospects and posing additional challenges to macroeconomic stability amid limited fiscal space, high external financing needs, and significant regional and global uncertainties.

The budget is vulnerable

The report reflects that achieving the fiscal targets of economic growth, provincial cash surpluses and fiscal deficit would not be possible. The budget is still based on optimistic growth and revenue targets, according to the report. He added that the budget estimates real GDP growth of 4.2 percent, significantly higher than World Bank and IMF forecasts.

Increases in provincial surpluses pose flood risks, the lender said, adding that the federal budget envisages a 45.1 percent increase in provincial surpluses, a key element of Pakistan’s fiscal consolidation strategy.

This increase is dependent on the successful implementation of the provincial Agriculture Income Tax (AIT) schemes, effective from 1 January 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 step up collection of GST services. However, these goals carry significant risks. Provinces will have to limit spending growth to maintain surpluses, a task that could prove difficult if revenue performance falls short, the lender said.

Recent floods, particularly in Punjab, threaten agricultural production. Mukhtarul Hasan said that based on the assumption that the impact of floods is contained, fiscal discipline is maintained and the IMFEFF program remains on track, economic growth is expected to remain at 3 percent. A few days ago, the World Bank had lowered its forecast for economic growth to 2.6%.

Inflation & external sector

The flood-related shock to food supplies is expected to push inflation above earlier forecasts, peaking at 7.2% this financial year, slightly above the official target.

The current account is expected to return to a small deficit of 0.3 percent of GDP this fiscal year as remittances and lower oil prices offset export losses and higher food imports, according to the lender. It said as post-flood recovery boosts import demand and remittances smooth out, the deficit is expected to widen further next fiscal year.

The World Bank has sought greater visibility into the movement of the exchange rate market. It recommended the activation of a deep and liquid interbank market without SBP mediation and wider participation by market players, including exporters, importers and foreign investors.

The lender called for the publication of detailed data on interbank market transactions, including volumes and participants, and the phasing out of ad hoc interventions so that the exchange rate reflects real supply and demand.

Anna Twum, the bank’s international trade expert, said Pakistan’s exports were barely equal to 0.1 percent of global exports, which in India’s case was over 5 percent. He warned that 70% of Pakistan’s exports are at risk due to new standards being introduced by the European Union (EU).

Fiscal deficit

The lender said fiscal consolidation is expected to continue under the current IMF program. However, flood-related relief and reconstruction needs will increase spending pressures, with the fiscal deficit expected to remain high at 5.4% of GDP in 2026, above the official target.

The World Bank said public debt is expected to remain elevated at 76% of GDP due to limited flood-related spending and increased financing needs. Gross financing needs will however remain high, reflecting maturing short-term debt, repayments to multilateral and bilateral creditors and upcoming Eurobond maturities, according to the lender.