Average inflation projected at 27.5pc: Growth likely to decelerate to 0.6pc: ADB

ISLAMABAD: Pakistan’s GDP growth is expected to decelerate significantly to 0.6 per cent in the fiscal year 2023 (ends 30 June 2023) compared to six percent in the last fiscal year, while average inflation is projected to more than double from 12.2 per cent to 27.5 per cent, in the wake of last year’s devastating floods, ballooning inflation, a current account deficit, and an ongoing foreign exchange crisis, said Asian Development Bank (ADB).

The bank in its latest report, “Asian Development Outlook (ADO) April 2023”, noted that a return to political stability with the formation of a new government after scheduled general elections would improve business sentiment.

The bank stressed that the stalled International Monetary Fund (IMF) program must be resumed to buttress falling reserves and ease the balance of payments crisis, in part by catalyzing financing from other sources.

The fund recently concluded talks with Pakistan on the pending ninth review of its extended fund facility which discussed policies to restore domestic and external sustainability.

Virtual discussions continue toward finalizing details on these policies. Their timely and decisive implementation is critical for Pakistan to regain macroeconomic stability, as is securing financial support from other development partners.

At the end of February 2023, items pending included a higher petroleum development levy, electricity tariff increases, and the withdrawal of electricity subsidies to export industries and agriculture. The government must also identify financing sources to fill the external financing gap, the Bank noted.

Growth is projected to slow substantially in fiscal 2023, reflecting the impact of floods and a foreign exchange crisis, with currency depreciation and supply disruption doubling inflation. Fiscal and current account deficits should narrow nevertheless.

GDP growth is forecast to rise to two per cent in the fiscal year 2024, assuming the resumption of macroeconomic stability, implementation of reforms, post-flood recovery, and improving external conditions.

Headline inflation is expected to decrease to 15 per cent in the fiscal year 2024 as global energy prices decline and flood-induced supply constraints are resolved, as well as from a high base effect.

The report noted that weighing on economic activity are the difficult political situation, economic losses and devastation from flooding, the ongoing foreign exchange crisis, tighter macroeconomic policies, and the challenging external environment.

High inflation will affect purchasing power and thus restrain domestic demand. Increased government spending to support relief, recovery, and rehabilitation in the aftermath of the floods is expected to compensate for some of the damage and disruption to economic activity during the first half of the fiscal year.

Agriculture will likely contract in fiscal year 2023 for the first time in 2 decades. This follows massive losses to cotton, wheat, and rice crops caused by flooding, as well as loss of livestock. A flood-induced supply shock severely affects industry and services.

The production of textiles, which are normally 25 per cent of industrial output and about 60 per cent of export goods, is expected to plunge because prices for imported cotton to replace domestic supply are driven up by the foreign exchange crisis.

The liquidity shortages caused by depleted foreign currency reserves are disrupting supply chains and making it harder to import essential raw materials, intermediate goods, and machinery for industry.

Consequently, many factories have either closed temporarily or operate below capacity. Industry is thus expected to contract in the fiscal year 2023 but, as demand and supply shocks dissipate, expand in the fiscal year 2024.

The fiscal deficit is projected to narrow slightly to the equivalent of 6.9 per cent of GDP in the fiscal year 2023.

If the IMF program remains on track, it will likely continue to shrink over the medium term as revenue mobilization measures gain momentum, including general sales tax harmonization and personal income tax reform.

The fiscal deficit stood at two per cent of GDP during July–December 2022, remaining stable from the same period of 2021, while the primary surplus rose from 0.1 per cent of GDP to 1.1 per cent. Domestic tax collection declined slightly by 0.4 per cent in the first half of the current fiscal year.

Copyright Business Recorder, 2023