ISLAMABAD: The World Bank has projected Pakistan’s economy to grow by two per cent in the next fiscal year, compared to the 3.5pc target set by the National Economic Council on Tuesday.

“In Pakistan, the lasting eff­ects of the August 2022 floods, along with policy uncertainty and limited foreign exchange resources to pay for imports of food, energy, and intermediate inputs, have depressed activity, with industrial production contracting by about 25pc in the year to March 2023,” the bank said in its latest Global Economic Prospects report, released on Tuesday.

“With dwindling foreign exchange reserves and stagnant remittances, the government has increased exchange rate flexibility, allowing the Pakistani rupee to depreciate by 20pc since the start of the year,” it added. “Consequently, headline consumer price inflation has risen sharply, reaching 38pc in the year to May, its highest level since records began in the late 1970s.”

It said that consumer price inflation remains above target in most economies and is particularly high in Pakistan and Sri Lanka. Limited foreign exchange reserve cover in some economies limits access to imported intermediate goods for production, it said.

At the same time, it also noted that policy rate increases in Pakistan have not kept pace with expected inflation; consequently, real interest rates have turned deeply negative. This means the World Bank wants Pakistan’s central bank to further increase policy rates from an existing peak of 21pc.

While poverty has recently been increasing in countries fac­ing severe economic pressu­res — notably Afghanistan, Pa­k­­istan and Sri Lanka — it is expected that the region will resume its downward trend that was interrupted in 2020-21.

The decline, however, will not be as quick as previously expected, given the impacts of high inflation, slow recovery in employment, and withdrawal of pandemic-related food support. The number of people in South Asia living on less than $3.65 a day in 2023 is expected to be well below the pandemic-induced uptick in 2020.

The bank said import restrictions imposed by several economies (Bangladesh, Nepal, Pakistan, Sri Lanka), which adversely affected economic activity, have been relaxed as external imbalances have improved and exchange rate pressures have eased.

Food export bans, however, are expected to remain in place in Bangladesh, India and Pakistan through this year despite falling global prices.

Some economies in South Asia have suffered significant domestic shocks, and deep crises are continuing to undermine growth, particularly in Afghanistan, Pakistan and Sri Lanka.

It said that the continuing effect of last year’s floods in Pakistan, compounded by worsening social tensions, high inflation, and policy uncertainty, is estimated to have limited growth to 0.4pc this fiscal year, a 1.6 percentage-point downward revision from January. The government has, meanwhile, put the current year’s GDP growth rate at 0.3pc.

“Agriculture output seems likely to have contracted for the first time in two decades. Economic recovery in the next two fiscal years is expected to be anaemic, with the growth of 2pc and 3pc, respectively, as there is limited fiscal room for the government to support recovery from flood-related damages,” the bank said in the report.

It observed that more than half of South Asia had been affected by one or more climate-related disasters over the past two decades, with the 2022 floods in Pakistan leaving one-third of the country under water and causing damage estimated at 4.8pc of GDP.

Overall, the report forecasts the growth in the region to slow marginally in 2023, to 5.9pc, and more significantly in 2024, to 5.1pc.