IMF’s macroeconomic projections for FY23

The IMF staff report on the seventh and eighth reviews of the EFF with Pakistan contains a detailed set of macroeconomic projections of the economy of Pakistan for 2022-23, and onwards to 2026-27.

The focus here is on projections for the on-going financial year, which do not incorporate the impact of the floods.

The first projection is of the GDP growth rate in 2022-23. Compared to the high growth rate of 6 percent achieved in 2021-22, the IMF expects it to fall sizably to only 3.5 percent in 2022-23.

Presumably, this is because the expectation is that severely contractionary monetary and fiscal policies will be followed to bring down sharply the current account and budget deficits and this will retard the process of growth.

However, there are contrary projections by the IMF which indicate that the buoyancy shown by the economy in 2020-21 and 2021-22 will continue. Net exports are expected to make a significant positive contribution to real GDP at factor cost as compared to the negative impact in 2021-22.

Further, private sector and public sector enterprises are projected as experiencing an investment boom in 2022-23. In real terms, the level of investment is expected to rise from 13.1 percent of the GDP in 2021-22 to 14.7 percent of the GDP in 2022-23, implying thereby a very high growth rate of 16 percent. Also, government investment is expected to rise by 0.3 percent of the GDP.

The economic theory used by the IMF is puzzling. There will be a negative ‘accelerator’ effect on investment due to the fall in the GDP growth rate from 6 percent to 3.5 percent, but the IMF is anticipating instead an investment boom. Other factors which are likely to impact on private investment are the high policy rate of 15 percent and the withdrawal of concessionary refinancing of projects by the SBP.

The annual Plan for 2022-23 prepared by the Planning Commission has projected a GDP growth rate of 5 percent, which is perhaps on the high side given the heavy focus of stabilization rather than growth this year. As such, a balanced projection of the GDP growth rate in 2022-23 is 4 percent, somewhat above the projection by the IMF.

The next important projection is of the rate of inflation in 2022-23. The IMF has made a very precise projection of 19.9 percent. This is significantly higher than the Annual Plan projection of 11.5 percent. The MPC of the SBP in one of its earlier meetings had projected the rate of inflation at 16 to 18 percent in 2022-23.

The rate of inflation in 2022-23 will hinge crucially on what happens to global commodity prices in the presence of a worldwide recession and on the extent of depreciation of the value of the rupee this year. The projections by the IMF reveal that the rupee is expected to depreciate sharply by over 24 percent as efforts are made to bring down the current account deficit by almost 47 percent this year.

Further, administered prices are expected to rise sharply in 2022-23 in line with the agreement with the IMF. The energy tariff is to be increased by Rs 7.90 per kwh, equivalent to an increase on average of 40 percent.

The rise in petrol levy to Rs 50 per litre will continue to exert upward pressure on prices of fuel products. The gas tariff may even be doubled to absorb the high price of LNG. Overall, there is the likelihood of substantial cost push inflation in 2022-23.

The jump in the rate of inflation has already been demonstrated by the year-on-year inflation in July 2022 of 27.3 percent. A relatively high rate of inflation is likely to persist this year for reasons given above. As such, a likelier range of the rate of inflation in 2022-23 is 23 percent to 25 percent.

My previous article has examined the BOP (balance of payment) projections for 2022-23 by the IMF. The fragile and uncertain nature of these projections has been highlighted. Perhaps the biggest problem with the IMF’s projection of the of a big reduction in the current account deficit of 47 percent in 2022-23 is based on the optimism that exports of goods will increase by as much as 12.6 percent.

This is unlikely in the face of only 3 percent projected growth in world trade. Presumably, that with the exchange rate falling by 24 percent, exporters will be in a more competitive position. However, exporters will now face a significantly higher interest rate on financing. The interest rate is also higher on borrowing for expansion of capacity or for new projects.

There is also the likelihood that the concessionary electricity tariff of 9 cents per kwh will be withdrawn. Already, there has been a decline in exports in July 2022 of 27 percent compared to the level in the previous month. It is clear now that draconian policy moves will be required in 2022-23 to reduce the current account deficit by almost half.

Turning finally to the IMF projections of public finances in 2022-23, there is need first to highlight some differences in relation to estimates by the Ministry of Finance.

The IMF has taken the budget deficit estimate for 2021-22 as 7 percent of the GDP, whereas the final estimate according to the fiscal operations for the year is significantly higher at 7.9 percent of the GDP. Also, the projected size of the deficit by the IMF in 2022-23 is 4.6 percent of the GDP whereas the official budget documents reveal it at 4.9 percent of the GDP.

The implied reduction in the size of the deficit in 2022-23 is at least 3 percent of the GDP. This has never happened before in earlier IMF programmes and it will require a miracle if it is to happen this year.

Much of the reduction in the deficit is to be achieved on the expenditure side. The level of expenditure, federal and provincial combined, is expected by the IMF to fall substantially from 19.1 percent of the GDP to 17.1 percent of the GDP, with current expenditure declining more from 17 percent of the GDP to 14.7 percent of the GDP.

The fall in the level of current expenditure is expected to happen when the cost of debt servicing is projected to increase by 0.3 percent of the GDP. This implies that the non-interest component of current expenditure will have to be contained from 12.4 percent of the GDP to 9.8 percent of the GDP.

The biggest fall is anticipated in subsidies from 2.3 percent of the GDP in 2021-22 to only 1.1 percent of the GDP, with bulk of the reduction in the power sector subsidies. These target reductions in expenditure will be very difficult to achieve.

Overall, the IMF Macroeconomic Projections for 2022-23 imply an extremely strong effort for stabilization of the economy, given its current very fragile state. The absolute size of the current account is to be reduced by 46 percent in relation to the deficit in 2021-22.

Similarly, the size of the budget deficit as a percentage of the GDP will have to be curtailed by over 41 percent. The Government faces an extraordinary challenge, and we pray for its success in a difficult global and domestic environment.

Copyright Business Recorder, 2022