KARACHI:
Pakistan’s central bank has forecast the country’s economic growth to remain modest, sticking to its initial forecast of 2-3% growth for the current fiscal year 2023-24. He says achieving a higher growth trajectory in the medium to long term depends on reforms that address persistent structural issues.
In its report on the “State of Pakistan’s Economy for the first half of the financial year 2023-24”, the State Bank of Pakistan (SBP) said: “Despite improving macroeconomic indicators, Pakistan’s economy continues to face structural headwinds bottlenecks that prevent the achievement of low and stable inflation with sustainable growth. The main issues include limited savings, low investment in physical and human capital, weak productivity, stagnant exports, a narrow tax base and inefficiencies in public sector enterprises (PSEs).”
“Furthermore, political uncertainty exacerbates the situation due to inconsistency in economic policies, weak governance and public administration. These underline the need for policy reforms to ensure sustainable growth in the medium to long term.”
The central bank’s forecast for growth in the 2-3% range remains higher than the International Monetary Fund’s (IMF) revised downwards forecast of 2% for the year 24, suggesting the SBP remains more bullish than the creditor. The SBP said that the modest economic recovery in the first half of FY24 is expected to continue in the second half of FY24. This is also reflected in the improvement in business confidence regarding expected economic conditions from November 2023.
High-frequency indicators suggest a moderate recovery in economic activity from November 2023 onwards. Apart from the recovery in cotton and rice production, prospects for a good wheat harvest during the 24th year have also increased. This is mainly due to higher cultivated area, better availability of inputs and favorable weather conditions.
The continued easing of foreign exchange (FX) restrictions has improved the supply chain situation and the availability of industrial raw materials, which is supporting some of the major industries.
Going forward, however, further energy price adjustments (possible upward revision in gas and electricity tariffs) and fiscal consolidation, warranted to slow the rate of debt accumulation, may continue to weigh on economic activity.
Continued tight monetary policy and fiscal consolidation are expected to keep domestic demand in check. In addition, the expected increase in wheat production may help maintain a downward trajectory in food inflation by improving supply and discouraging any speculative sentiments.
“On the other hand, any significant increase in managed energy prices may offset the impact of these positive developments on the inflation outlook. Incorporating these factors, the SBP has revised (up) the inflation forecast range to 23–25% for FY24.”
Escalating geopolitical tensions, adverse weather conditions, adverse movements in global oil prices and subsequent external pressures are some significant upside risks to the improved outlook.
Interest payments, increase in non-tax revenue
Interest payments rose sharply to 61.6% of total income in 1H24 compared to 54.8% in the same half of the previous year, mainly due to the central bank keeping interest rates at record levels, weighing on the economy and making the debt unsustainable.
In other words, interest payments rose to 4% of GDP in the half from 3.1% of GDP in the same half of the previous year, widening the fiscal deficit to 2.3% in the half from 2% in the same half of the previous year . Non-interest expenditure also increased due to increased disbursement of electricity subsidies, grants to settle contingent liabilities related to PSEs and higher expenditure on public government, defense and pensions, the report said.
On the other hand, the increase in total revenue (as a percentage of GDP) was largely due to higher non-tax revenue, as taxation to GDP improved little. New tax measures, a modest pick-up in economic activities, higher inflation, rupee depreciation compared to H1FY23 and rising corporate profits and deposit returns supported the Federal Board of Revenue’s (FBR) tax collection ) to increase by almost 30% during the six months under review.
The main contributors to non-tax revenue were higher SBP earnings, increased collection from Petroleum Development Levy (PDL) mainly due to increase in PDL rates and interest collections from federal loans to PSEs and provinces.
CAD, exports, remittances are improved
The central bank also projected a lower current account deficit (CAD) compared to earlier and a boost to foreign reserves in FY24.
“The outlook for the external account has improved. The CAD is expected to be lower than previously forecast, while the disbursement of the last $1.1 billion tranche under the IMF’s SBA would help maintain external buffers.” Additionally, a slightly improved global outlook and domestic growth prospects are expected to boost foreign exchange earnings from exports and remittances. While resilient global demand may have a positive impact on Pakistan’s exports, subdued global commodity prices may significantly suppress import prices, leading to an overall contraction in the import bill and hence an improvement in the trade balance.
Taking these factors into account, the SBP projects the current account deficit to be between 0.5–1.5% of GDP for FY24. This outlook remains susceptible to adverse movement in international commodity prices and continued tight global financial conditions.
Under these circumstances, it is imperative to boost exports through reforms aimed at boosting productivity and attracting foreign direct investment (FDI) in export-oriented sectors in order to keep the CAD at a sustainable level without curtailing domestic economic activities .
Published in The Express Tribune, May 15u2024.
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