KARACHI: Pakistan’s economic situation has presented early signs of improvement in the initial months of this fiscal year and the State Bank of Pakistan (SBP) has projected 2-3 percent real GDP growth with 20-22 percent inflation in FY24.
The SBP on Monday issued its annual report on the State of Pakistan’s Economy for the fiscal year 2022-23 (FY23) and predicted a better economic outlook for FY24 compared to FY23. The report said that high frequency indicators are suggesting bottoming out of economic activity from July 2023.
“After a year of turbulence, Pakistan’s economic situation has started to show some early signs of improvement as the country was able to secure a $3 billion Stand-By Arrangement (SBA) from IMF, towards the end of FY23, which helped in alleviating immediate mid-term risks to external sector,” the report said.
Furthermore, according to the July 2023 World Economic Outlook, the prospects for global economic growth in 2023 have somewhat improved, compared to earlier projections. Similarly, the non-energy global commodity prices have also eased compared to last year. “These trends may have positive implications for Pakistan’s economy,” the SBP said.
With higher foreign exchange earnings from exports supported by improved global and domestic growth prospects, the outlook for the external account has also improved at the start of FY24 and as per SBP’s projection the current account deficit to fall in the range of 0.5-1.5 percent of GDP in FY24. On domestic front, the SBP projects fiscal deficit in the range of 7-8 percent in FY24.
The report said that the lagged impact of monetary tightening, and other measures, is expected to keep domestic demand in check. Moreover, prospects of improvement in supply situation on account of likely increase in production of important crops and resumption of imports, is expected to further moderate inflationary pressures in FY24.
In addition to the improvement in domestic supplies, a high base from last year and sluggish trend in non-energy global commodity prices are expected to help bring down inflation in the range of 20-22 percent in FY24.
However, SBP has warned that, unforeseen climate events, adverse movements in global commodity prices, especially oil, and external account pressures are some important upside risks to this outlook.
According to the report, the withdrawal of guidance on import prioritization from end-June 2023, alongside gradual ease in FX position, is expected to somewhat ameliorate supply chain situation and lift growth in LSM as well as exports.
The initial disbursement of $ 1.2 billion under the SBA in July 2023, alongside $ 3 billion bilateral inflows, helped reverse the declining trend in the SBP FX reserves. To encourage cotton production, the government has announced a minimum price of Rs 8,500 per 40 kg for the FY24 crop, therefore, an expected rebound in cotton and rice production will support agriculture growth in FY24.
According to the preliminary information, the government’s minimum price incentive has helped in securing increase in cotton sowing area, and is also likely to encourage farmers to scale up crop management practices despite rising prices of fertilizers and pesticides.
Reflecting the impact of these incentives, cotton arrivals posted a strong 97.5 percent increase as on September 1, 2023, compared to the same period last year. Similarly, favorable weather conditions and a steep increase in domestic rice prices incentivized growers to expand area under rice crop and hence production in the ongoing year, the report mentioned.
The expansion in commodity producing sectors is expected to have a knock-on impact on services in FY24. However, the impact of various demand compression measures introduced in past two years may contain the pace of recovery in economic activity. Reflecting these considerations, the SBP expects the real GDP growth to fall in the range of 2-3 percent in FY24, the report said. The SBP has mentioned that higher interest payments may continue to prevent a notable reduction in spending during FY24. However, non-interest expenditure is expected to remain contained on account of lower subsidies and grants.
With a tepid recovery in economic activity, SBP is also expecting higher revenue collection during FY24. In FY24, the government has envisaged to boost revenues by increasing PDL to Rs 60 per liter, and announcing higher rates on top income tax brackets, builders, developers and property, and introducing additional GST on unregistered businesses.
The finalization of Stand-By Arrangement with the IMF was instrumental in reviving confidence of multilateral and bilateral creditors, as well as international investors, and led to sizeable foreign inflows during the first two months of FY24, the report said.
On the other hand, slightly improved global and domestic growth prospects are expected to bolster foreign exchange earnings from exports of goods and services. Although import volumes are likely to increase, lower commodity prices may prevent a significant expansion in imports bill during FY24. Workers’ remittances in FY24, however, are expected to remain slightly lower compared to the last year’s level.
Copyright Business Recorder, 2023
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