Economic projections

The World Bank (WB) and the Asian Development Bank (ADB) have both released economic projections of Pakistan. Both projections portray Pakistan as a country in great financial stress and facing the worst stagflation, with no real prospect of a substantial improvement in the medium run. The WB has, in fact, prepared a comprehensive report on Pakistan: Recent Economic Developments, Outlook and Risks.

The WB has brought down its earlier projection of a GDP growth rate of 2 percent in 2022-23 to 0.4 percent for the year. The ADB expects it to be only marginally higher at 0.6 percent. Among South Asian countries, Pakistan will have a growth rate higher than that of post-default economy of Sri Lanka, which is projected to see a significant decline of 3to 4 percent in its GDP.

Both the development banks are still somewhat optimistic about Pakistan’s growth prospects in 2022-23. Recently-released statistics reveal that damage inflicted by the floods on crop output was larger than initially estimated. Cotton, rice, and maize outputs are down by 35.0 percent, 29.2 percent and 13.5 percent, respectively, in relation to the level last year. This alone has led to a fall in the major crop sector of over 6 percent. Minor crop supplies have also been badly affected as demonstrated by the huge jump in prices of vegetables and there has been a loss of over 1 million livestock. A conservative estimate of the fall in agricultural output in 2022-23 is 3 percent, whereas the World Bank estimates the decline at only 1 percent.

Similarly, the World Bank is likely to have also understated the decline in the industrial sector by 2.3 percent. Already, the large-scale manufacturing sector has demonstrated a fall of 4.4 percent in the first seven months of 2022-23. The fall is increasing over the months with recent closures in many industries. The construction sector has been in a deep recession with a decline in cement output of 13.1 percent and of iron and steel by over 3 percent. Overall, here again the fall in value-added by the industrial sector in 2022-23 is likely to be significantly larger than that projected by the World Bank.

Turning to the services sector, the WB projects a positive growth rate of 1.8 percent in 2022-23. This again is on the high side, because two of the largest sub-sectors, wholesale and retail trade and transport and communications, are likely to contract this year. The former is due to the negative growth rate in the commodity producing sector and in the volume of imports. The latter is also likely to shrink as revealed by the quantum fall in consumption of High Speed Diesel (HSD) oil and motor spirit (MS) 23.3 percent and 14.9 percent, respectively.

Overall, the recent release of production and consumption statistics for the first eight months has led to the emergence of an even more grim short-term growth outlook for 2022-23. Our earlier expectation was that the GDP growth rate in 2022-23 was likely to be a negative 1 percent. It is now more likely to be in the range of negative 2 percent to 2.5 percent. Clearly, both projections of the growth rate by the WB and the ADB are still optimistic in nature.

The rate of inflation in 2022-23 has been estimated at 27.5 percent by the ADB and at 29 percent by WB. Already, the average rate of inflation had reached 27.2 percent in the first nine months, with a substantially higher rate of 35.4 percent in March 2023. In effect, the ADB is expecting a fall in the rate of inflation after March 2023. The WB’s projection implies an average rate of inflation in the last quarter of 2022-23 of 34.4 percent. This is still somewhat lower than the rate of inflation in March. A more likely scenario is that the rate of inflation in the last quarter will remain close to the rate in March and possibly even higher. As such, the projected rate of inflation in 2022-23 is likely to be in the range of 30 percent to 30.5 percent.

The WB has also projected the size of the two deficits in 2022-23. The current account deficit is expected to be restricted to 2 percent of the GDP and the fiscal deficit to reach 6.7 percent of the GDP in 2022-23.

The low current account deficit reflects the strenuous efforts made to restrict the volume of imports, especially by control over import LCs. Consequently, the value of imports of goods and services is lower by as much as 22.5 percent. Will such a big curtailment be possible in the last quarter of 2022-23? If the output and exports are to be sustained of the textile sector, then in light of the big shortfall in domestic cotton output, total import of cotton in 2022-23 will have to be close to 4 million bales higher than the import last year. Similarly, imports of wheat will need to be over 2.5 million tons.

Further, imports of petroleum products have declined in volume terms in the first eight months by as much as 32 percent and the likelihood is there of impending shortages. Therefore, the severe contraction of imports that took place in the first nine months may not be sustainable. As such, the current account deficit could be under greater pressure in the last quarter of 2022-23. If, however, the policy of heavily restricting imports continues then we are likely to witness severe shortages and a further upsurge in prices.

The budget deficit projection of 6.7 percent of the GDP represents a large divergence of 1.8 percent of the GDP from the target of 4.9 percent of the GDP for 2022-23. This is primarily due to the quantum jump in debt servicing because of much higher interest rates and the increase in the quantum of borrowing. It is likely to be 1.5 percent of the GDP higher. As such, with some shortfall in FBR revenues and in revenues from the petroleum levy, along with a big shortfall in the provincial cash surplus, the budget deficit in 2022-23 could exceed 7 percent of the GDP.

The most worrying projection by the WB is that the external financing needs of Pakistan are likely to average a large $28.95 billion during the three years, 2022-23 to 2024-25.

It is not surprising that the Bank expresses very serious concerns about the financial sustainability of Pakistan’s economy. However, a detailed break-up of the financing needs and potential sources has not been given. The question is that if Pakistan is so neck deep in a financial crisis, then how will a positive GDP growth rate of 2 percent be achieved in 2023-24?

Copyright Business Recorder, 2023