Political uncertainty impacting Pakistan economy, says SBP

Pakistan’s economy is grappling with structural bottlenecks, exacerbated by political uncertainty, despite some improvement in macroeconomic indicators, the State Bank of Pakistan (SBP) said on Tuesday, predicting real GDP growth of 2%-3% for fiscal 2024.

The central bank said in its six-monthly report that there had been a moderate recovery in real economic activities since last year.

But “political uncertainty exacerbates the situation through inconsistency in economic policies, weak governance and public administration”, it said in the Half Year Report 2023-2024 (The State of Pakistan’s Economy).

Downside risks for the economy remained exceptionally high, the International Monetary Fund (IMF) said last week in its staff report on the country ahead of talks with the IMF on a longer-term programme.

The IMF added that political complexities and high cost of living could weigh on policy, adding that policy slippages, together with lower external financing, could undermine the narrow path to debt sustainability and place pressure on the exchange rate.

The central bank in its report said that political uncertainty underscored the need for policy reform, adding that one of the most significant challenges amplified by structural issues was high and persistent inflation.

The report said nevertheless that inflation, despite the uncertainty, was expected to remain on a downward trajectory.

Consumer price inflation slowed to 17.3% in April from a year earlier, the lowest reading in nearly two years.

Structural challenges persist

The SBP emphasised that policy and structural challenges need to be addressed as a necessary tailwind to create a conducive environment for a long-term disinflationary trend to set in and to achieve low and stable inflation on a sustainable basis.

“The major issues include limited savings, low investments in physical and human capital, weak productivity, stagnant exports, narrow tax base, and inefficiencies in the public sector enterprises,” it said.

As per the report, the average National CPI inflation in H1FY24 stood at 28.8%, compared to 25% in H1FY23.

“Whilst the SBP will continue to anchor inflationary expectations and contain the second round impact of supply-shocks, as and when need be, further fiscal consolidation and reduction in uncertainty is imperative to achieve the medium term target of 5–7% by the end of FY25,” the report said.

Further, given the intensive and successive nature of inflationary pressures stemming from non-monetary sources and vulnerabilities thereof, policy and structural challenges needed to be addressed, it added.

It may be noted that Pakistan’s headline inflation reading has slowed in recent months, from 28.3% in January 2024 to 17.3% in April 2024, with expectations to ease further in coming months.

The central bank said its monetary tightening, supported by social fiscal consolidation, lower global commodity prices, and improved domestic crop output, pushed the NCPI inflation came down from its peak of 38% in May 2023 to 29.7% in December 2023, while core inflation has also gradually started to decelerate.

“Notwithstanding the importance of various determinants of inflation……..the role of monetary policy remains instrumental given that money supply and inflation expectations have been found to be significant contributors to inflation.

“Nonetheless, the size of adjustments in the policy rate and its consequent economic costs can be substantially reduced by addressing the long-standing policy and structural challenges.”

Real GDP grows by 1.7% during H1-FY24

According to the report, real GDP grew by 1.7% during H1FY24 compared to 1.6% in H1FY23, and a contraction of 1.9% in H2FY23.

“The growth in H1FY24 was led by agriculture, with significant increases in the production of cotton and rice, mainly owing to favorable weather conditions, better availability of inputs and policy incentives. These factors also encouraged farmers to increase area under wheat cultivation,” the central bank said.

UN expects Pakistan’s GDP growth to clock in at 2% in 2024, improve further in 2025

The SBP said the recovery in agriculture sector supported some of the agro-based industries. In addition, withdrawal of import prioritisation measures improved availability of raw materials for industry.

“This is reflected in a considerably lower contraction in large-scale manufacturing (LSM) during H1-FY24 compared to H1FY23.”

It further said the approval of the IMF’s Stand-By Arrangement (SBA) “partially eased external borrowing constraints, leading to an increase in financial inflows during H1FY24”.

In addition, lower scheduled external loan repayments compared to H1FY23 and significant reduction in the current account deficit supported the build-up in the SBP’s foreign exchange reserves, the report added.