IMF projections

The latest World Economic Outlook has been released by the IMF. The report highlights the slowing down of global economic activity with inflation higher than seen in several decades. The cost-of-living crisis, tightening of financial conditions in most regions and the Russia-Ukraine war are all weighing heavily on the outlook.

Consequently, the IMF projects that the growth rate of the world economy will slow down from a healthy 6% in 2021, to 3.2% in 2022 and to only 2.7% in 2023. Global inflation is forecast to rise from 4.7% in 2021 to 8.8% in 2022 but decline to 6.5% in 2023.

The volume of world trade for non-fuel exporters is expected to show little growth, with 0.5% increase in 2022 and 2.3% growth in 2023. The terms of trade are also likely to deteriorate for developing economies.

The widening gap in the process of growth among major South Asian economies has been quantified. India and Bangladesh are expected to show high GDP growth rates of 6% to 7% in 2022 and 2023. Pakistan’s growth rate is projected at only 3.5% in 2022 and 5% in 2023. Sri Lanka, after its default, is likely to see the continuation of a negative growth rate of 3.1%.

The implications of the developments in the world economy are generally not positive for Pakistan. The likelihood of very limited growth in world trade diminishes the prospects for exports by Pakistan. A double-digit growth rate is required in exports if Pakistan is to bring down sharply the current account deficit in 2022-23 to reduce the external financing requirement.

On the positive side, international commodity prices are likely to stabilize and help in containment of the import bill. However, following the cut of 2 million barrels by OPEC of exports has tended to raise the oil price by about $2 to $4 per barrel. Fortunately, there has been a quantum decline already in international prices of palm oil, cotton, DAP fertilizer and iron and steel. This should help in some containment of the import bill in 2022-23.

Going beyond the IMF projection of GDP growth rate of 3.5% in Pakistan in 2022-23, there is need to highlight that this does not reflect the large negative impact of the worst floods in the country’s history on the growth rate and other macroeconomic variables. The first estimate of the cost to the economy of this natural disaster is as high as $30 billion.

The likelihood is that post-floods the GDP growth rate will be close to 1.5%, significantly lower than the IMF estimate. With the big damage and loss of crop output and livestock, the agricultural sector is likely to contract by 3% in 2022-23. This will impact on the other sectors and the industrial sector will probably achieve a growth rate of 3.5%, while the growth rate of the services is likely to be close to 2.5%. Real per capita income is likely to fall this year.

Surprisingly, the IMF expects the level of investment to rise in 2022-23 to 16.7% of the GDP from 14.6% of the GDP in 2021-22. The ‘accelerator’ effect should be negative with the fall in the GDP growth rate from 5% to 1.5%. Already, there are indications that private investment is falling. A more likely projection is a fall in the overall rate of investment to 14% of the GDP in 2022-23.

The inflation rate projected by the IMF for 2022-23 is close to 20%. If import prices do fall generally and a food shortage situation is avoided through larger imports of wheat, vegetables and pulses then the 20% growth rate in the CPI is an appropriate projection for inflation in the country.

The biggest divergence between the IMF projection and the likely outcome in 2022-23 is in the budget deficit. The IMF expects it to come down sharply from 7.9% of the GDP in 2021-22 to only 4.9% of the GDP in 2022-23. The low GDP growth rate is likely to restrict the size of the various tax bases. Corporate profits are going to be much lower, given the higher cost-push inflation due to increases in electricity and gas tariffs and transport costs.

Also, the revenues from the petroleum levy will be much lower due to the big contraction in demand for petroleum products, following the big hike in prices. Overall, the national tax-to-GDP ratio could be lower than the budgeted level by almost 1% of the GDP.

Current expenditure of both the federal and provincial governments will be significantly higher due to expenditure on relief and rehabilitation of the 33 million people affected by the floods. Consequently, even after diversion of funds from development, total public expenditure is likely to be higher by 0.5% of the GDP.

Overall, the fiscal deficit is likely to be significantly larger than the projection of 4.9% of the GDP by the IMF. A more probable outcome is a consolidated budget of 6.4% of the GDP. It is essential that this target be renegotiated with the IMF to incorporate the impact of floods.

Finally, the projection of considerable importance is the current account deficit in 2022-23. The IMF has projected it at 2.5% of the GDP as compared to 4.6% of the GDP in 2021-22. The decline is anticipated on the basis of slower growth and moderation or even fall in import prices.

However, as highlighted above, export growth, if any, is likely to be modest and the floods impact means that exports of rice and textiles will be smaller. Also, imports of cotton and wheat will need to be significantly larger. Overall, the current account deficit could be somewhat larger at 3% of the GDP.

A summary is given above of the IMF pre-floods projections with the likely outcome of key macroeconomic variables which incorporates the impact of the floods.

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               MACROECONOMIC PROJECTIONS
                         2022-23
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                        IMF Projections       Likely
                          (Pre-Floods)   (Post-Floods)
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GDP Growth Rate (%)           3.5                  1.5
Investment (% of GDP)        16.7                 14.0
Rate of Inflation (%)        19.9                 20.0
Budget Deficit (% of GDP)    -4.9                 -6.4
Current Account Deficit      -2.5                 -3.0
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