Pakistan's GDP growth projected to remain below 3–4% in FY23, says SBP

The State Bank of Pakistan (SBP) expects Pakistan’s GDP growth to moderate considerably during FY23, according to its flagship report on the country’s economic health.

According to the SBP’s ‘Annual Report on The State of Pakistan’s Economy’ released on Wednesday, the central bank projects real GDP growth below the previously-announced range of 3–4% for FY23, after taking into account the destruction caused by floods and the policy focus on stabilisation.

The central bank said that as suggested by the tapering sales of high-frequency demand indicators, demand compression measures introduced by the government and the SBP have started to cool down the overheated economy in the initial months of FY23.

The SBP said that the economy was already in a stabilization phase, when wide scale flooding hit a large part of the country at the start of FY23.

“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,” said the report.

On the other hand, continuing the policy efforts to arrest demand pressures, the government and the SBP announced further corrective measures in the ongoing year.

These included: (i) temporarily halting fresh disbursements under the schemes of Mera Pakistan Mera Ghar (MPMG) and Kamyab Jawan Youth Entrepreneurship for revisiting it later (KJYE); (ii) imposition of additional import duties on various categories including steel, food preparations and transport; (iii) restoration of fuel taxation; (iv) introduction of temporary restrictions on certain imports; (v) a further 125 bps increase in policy rate in July 2022; and (vi) 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,” said the report.

SBP was of the view that the NCPI inflation is expected to rise above the previously announced range of 18-20% 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 SBP said that the government has targeted to reduce the fiscal deficit to 4.9% of GDP in FY23 from 7.9% in FY22. “This outcome would be achieved through both revenue and expenditure measures,” it said.

The SBP projects current account deficit (CAD) to fall below last year’s level of 4.6% of GDP in FY23.

“This improvement would be driven by a sizeable contraction in import growth,” it said.

“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,” said SBP’s report.

“However, the losses to agriculture produce, induced by the recent floods, is likely to step up import of agriculture commodities, particularly cotton,” it said.

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.

On workers’ remittances, the SBP report said that after witnessing a spike in FY21 appear to have plateaued in FY22 and are likely to remain at around a similar level in FY23.

Moreover, with the resumption of the IMF programme, the outlook of the 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,“said the report.