SBP report maintains GDP growth forecast at 2-3%

KARACHI:

Pakistan’s economic landscape faced unprecedented challenges throughout the financial year 2022-23, as outlined in the ‘Governor’s Annual Report 2022-23’ presented by State Bank of Pakistan (SBP) Governor Jameel Ahmad, the manufacture. The comprehensive report not only delves into the challenges facing the country, but also lays out strategies to address them and strengthen economic resilience.

Ahmad opened the report on a cautiously optimistic tone, stating that economic activity appeared to have bottomed out from July 2023. The central bank maintained its original forecast of GDP growth of 2-3%, with significant contribution expected from the recovery of agricultural production in the current financial year.

The report highlights the positive outlook for export earnings and predicts a growth trajectory for the country’s foreign exchange reserves. The SBP, in its previous statements, has consistently projected reserves to cross $9 billion by the end of June 30, 2024.

One of the key pillars of SBP’s strategy, as highlighted in the report, is a data-driven approach. Ahmad reiterated the bank’s commitment to closely monitor high-frequency inflation data to determine future policy rates. Controlling inflation remains a primary objective and the stability of this measure is seen as critical to achieving sustainable long-term economic growth.

Amid global uncertainties, including commodity price fluctuations and above-target inflation in advanced economies, the SBP emphasized its commitment to a data-driven approach to calibrate monetary policy decisions. This approach allows the bank to respond to the changing short-term outlook for inflation, ensuring flexibility in the face of evolving economic conditions.

Ahmad confirmed the central bank’s earlier forecast, arguing that average monthly inflation would remain in the 20-22% range for the 2023-24 financial year. This comes as the bank’s key policy rate remains at a record high of 22% from the end of June 2023.

Addressing current account deficit (CAD) concerns, the report forecasts a low CAD in the range of 0.5-1.5% (below $4 billion) for the current financial year. This projection is in line with SBP’s broader strategy to maintain stability in external accounts and ensure a sustainable balance of payments.

Reading Strong agriculture sector to achieve GDP target

The Governor’s Annual Report 2022-2023 takes a look back at the financial year, recognizing the significant challenges facing Pakistan. External and domestic shocks, structural weaknesses and persistently high inflation amid economic contraction were some of the notable obstacles. The report identifies factors such as monsoon floods, elevated global commodity prices, fiscal consolidation issues and delays in the International Monetary Fund’s expanded capital facility program as contributing to these challenges.

Average National Consumer Price Index inflation rose to 29.2% in 23, reaching the upper end of the SBP’s revised inflation projection range. The report attributes this to the aggressive monetary policy adopted by most advanced and emerging economies, alongside the pass-through of higher fuel and food prices, exchange rate depreciation and other domestic factors.

Political uncertainty is highlighted as another factor affecting business and consumer sentiment, ultimately affecting economic activity. Real GDP shrank by 0.2% and the government’s fiscal and primary balance targets were missed, mainly due to lower-than-planned tax revenues and reduced subsidies. In response to these challenges, the SBP maintained an accommodative policy throughout the fiscal year, raising the policy rate by 825 basis points cumulatively. The report highlights that while these measures may have short-term effects on economic activity, they were deemed necessary to meet external debt obligations and ensure macroeconomic stability in the medium term.

Stability in the financial system is a key focus of the SBP, as reflected in the report’s recognition of the stable growth of the country’s financial sector. Total banking sector assets grew by 17% in 2023, with Islamic Banking Institutions outperforming their conventional counterparts in various aspects.

The report reaffirms the SBP’s commitment to maintaining price stability, emphasizing the critical role of fiscal policy and effective management in supporting stability. The SBP aims to prevent high inflation from entrenching and is trying to stabilize inflation expectations to meet the medium-term target of 5-7% by the end of the 25th year. The outlook for FY24 includes an expected containment of inflation at 20-22%, due to tight monetary policy, improved domestic supplies, lower global commodity prices and the effect of a high base.

Published in The Express Tribune, December 30^u2023.

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