KARACHI: Taking into account the destruction caused by floods and the policy focus on stabilization, the State Bank of Pakistan has projected real GDP growth below the previously announced range of 3-4 percent for FY23.
According to the SBP’s annual Report 2021-22 titled “The State of Economy Pakistan” released Wednesday, the country’s economic growth is expected to moderate considerably during FY23. Although, the economy has achieved some 6 percent growth in FY22, however, the real GDP growth in FY23 will be even below the previously announced range of 3-4 percent, it said.
The demand compression measures introduced by the government and the SBP have started cooling down the overheated economy in the initial months of FY23 and the economy was already in a stabilization phase, when wide scale flooding hit a large part of the country in the start of FY23, it added.
Moreover, with the resumption of the IMF program, the outlook of financial account has also improved. Alongside the IMF program disbursements, the country is expected to receive external financing from multilateral and bilateral creditors that will considerably strengthen FX reserves position during FY23.
Continuing the policy efforts to arrest demand pressures, the government and the SBP announced further corrective measures in the ongoing year. These included temporarily suspension of Mera Pakistan Mera Ghar (MPMG) and Kamyab Jawan Youth Entrepreneurship for revisiting it later (KJYE), imposition of additional import duties on various categories including steel, food preparations and transport, restoration of fuel taxation, introduction of temporary restrictions on certain imports, monetary policy tightening and linking markup rates on EFS and LTFF loans with policy rate. “These measures, together with the lagged impact of 675 bps hike in policy rate and other demand management measures announced in FY22 and the government decision to unwind the fiscal package for fuel and electricity subsidies towards the end of FY22 are likely to slow the momentum of economic activity during FY23,” the report said.
In addition, the government has targeted to reduce the fiscal deficit to 4.9 percent of GDP in FY23 from 7.9 percent in FY22. This outcome would be achieved through both revenue and expenditure measures.
Pakistan's CPI-based inflation in November clocks in at 23.8%
The coordinated fiscal and monetary policy stance is likely to reduce external account pressures in FY23. The SBP projects CAD to fall below last year’s level of 4.6 percent of GDP in FY23.
According to the SBP, the flooding in FY23 is likely to impinge on the country’s real economic activity through various channels. Specifically, the losses in agriculture emerging from the damages to crops and livestock are likely to transmit to the rest of the economy through various backward and forward linkages.
Similarly, the wide scale destruction of infrastructure in the affected provinces may also undermine the country’s growth prospects during the year
The NCPI inflation is expected to rise above the previously announced range of 18-20 percent during FY23. Supply shocks in the form of the rollback of energy subsidies and resumption of fuel taxation and losses to agriculture produce caused by floods are likely to influence the inflation trajectory during the year.
The elimination of subsidies and increase in fuel taxation triggered a sharp increase in inflation since June 2022, and the trend is likely to persist in FY23.
Similarly, the SBP pointed out that the supply shortages of perishable food commodities stemming from floods are expected to add further stimulus to prices. On the other hand, the stabilization policies introduced since last year and flood induced losses to incomes may suppress the magnitude of demand-pull inflation during the year.
The report expects that widening of tax base through elimination of exemptions, increase in tax rates and reinstatement of fuel taxes are expected to boost tax receipts during FY23. The non-tax revenues will also recover with the re-imposition of PDL.
On the expenditure side, the report said that the rationalization of subsidies is likely to keep current spending under check. However, the government has envisaged an increase in social protection grants under BISP, because of increase in the amount of stipend and extension in the coverage of beneficiaries.
Similarly, the relief and rehabilitation efforts in flood affected regions may also raise spending needs during the year. The containment in the pace of non-priority current spending and increase in revenue collection may provide fiscal space to expand the volume of development spending during FY23, the report said.
This improvement would be driven by a sizeable contraction in import growth. As evident from the YoY declines in imports since July 2022, a range of demand compression measures introduced since last year, have succeeded in trimming the growth momentum of imports. Likewise, global commodity prices have also started to soften after reaching multiyear peaks in FY22, which will reduce the pressure caused by a large price impact. However, the loss to agriculture produce, induced by the recent floods, is likely to step up import of agriculture commodities, particularly cotton.
On the other hand, the slowdown in global demand may also weaken the growth in exports during FY23 and policy tightening in advanced economies would dampen the prospects of capital flows to emerging and developing economies.
The workers’ remittances after witnessing a spike in FY21 appear to have plateaued in FY22 and are likely to remain at around the similar level in FY23. The windfall gain from oil price in GCC countries offers an upside risk to this projection, the report concluded.
Copyright Business Recorder, 2022
Comments
Comments are closed.