The IMF projections

The IMF has made projections for 2023 and a number of subsequent years at the global and country level in its latest publication, World Economic Outlook, of April 2023.

This publication contains projections of all the key macroeconomic variables of the economy for Pakistan from 2022-23 onwards. These projections are of importance because they reflect the prospects for Pakistan under the umbrella of an IMF program up to June 2023.

Beyond this, there is the high likelihood that Pakistan may go in for another three-year Extended Fund Facility with the IMF after June 2023 with the likely objective of being able to achieve some restructuring of its external debt. Therefore, medium-run projections for 2023-24 to 2025-26 are also important.

The objective of this article is to look at the IMF projections for 2022-23 and assess them in light of the prevailing short-term trends. As such, the projections of the rate of GDP growth, level of investment, rate of inflation, fiscal deficit, current account deficit and rate of unemployment by the IMF are examined in the succeeding paragraphs.

The scaling down of the GDP growth rate from 3.5% in the previous publication of the World Economic Outlook to only 0.5% in 2022-23 may have come as a surprise to many analysts. The large-scale scaling down of the growth rate is because now the big negative economic impact of the devastating floods on agricultural output and indirectly on other sectors has been incorporated,

Further, there is a need to reflect the impact of the physical restraint on imports of inputs and raw materials for various sectors, especially large-scale manufacturing. Already, the sector has contracted by over 4%. Similarly, there are visible indicators of contraction in sectors like construction, wholesale and retail trade and transport.

Therefore, there is now the likelihood that there may even be negative growth of almost 2% in the GDP in 2022-23, with the fall in value added by the agricultural, industrial, and service sectors of 3%, 4% and 1% respectively. As such, the IMF projection of a 0.5% growth rate in the GDP remains optimistic.

The second projection by the IMF is of total investment as a percentage of the GDP. It was 15.1% of the GDP last year and it is anticipated that it will fall somewhat to 14.3% of the GDP in 2022-23. Here again, the decline in the level of investment is understated.

The regime of extremely high interest rates and the stagflation in the economy have clearly had a big impact on private investment.

Two indicators reveal the quantum fall in private investment. First, credit to the private sector has contracted by as much as 75% in the first three quarters of 2022-23. Second, imports of machinery are down by almost 45%.

Also, the development spending by the federal government is likely to be even below 1% of the GDP, to limit the size of the budget deficit, Overall, a bigger decline can be anticipated in the level of investment in 2022-23. As opposed to projection of 14.3% of the GDP by the IMF it is likely to be closer to 12.5% of the GDP.

There are also serious problems with the IMF projection of the rate of inflation in 2022-23. The expectation is that it will average 27.1% over the twelve months and stand at 27.4% at the end-month of June 2023. It is indeed surprising that the IMF is not reflecting the upsurge in the rate of inflation in Pakistan.

It has already reached 35.1% in March 2023, and it is highly unlikely to remain lower at 27.4% in June 2023. The probability is that it will remain close to 35% or even rise in the last quarter of 2022-23. As such, the likelihood is that the average rate of inflation in 2022-23 will approach 30%, as opposed to the 27.1% projection by the IMF.

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                                      By IMF   Likely
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GDP growth rate (%)                     0.5      -2.0
Level of Investment (% of GDP)         14.3      12.5
Rate of Inflation, average (%)         27.1      30.0
Growth rate of the volume of Imports  -20.3     -25.0
Growth rate of the volume of Exports   -6.5     -10.0
Unemployment Rate (%)                   7.0       9.0
Budget Deficit (% of GDP)              -6.8      -6.8
Current Account Deficit (% of GDP)     -2.3      -2.3
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Two other projections by the IMF have a lot of significance from the viewpoint of policy. These are projections of the growth rate in the volume of imports and exports. IMF expects these to be negative 20.3% in the case of import volume and a fall in export volume of 6.5% in 2022-23.

The value of imports in dollars has already declined by 25.3% and that of exports by almost 10% in the first three quarters of 2022-23. The overall international commodity price index is expected to remain effectively unchanged in 2022-23 according to the IMF projections for the global economy. Therefore, the decline in the volumes of imports and exports is likely to be somewhat larger than indicated by the IMF projections.

The IMF also projects that there will only be a modest increase in the unemployment rate from 6.2% in 2021-22 to 7% in 2022-23. This is again on the optimistic side. With a negative GDP growth rate, the ability of the economy to absorb the additional labor force of 1.6 million is very limited. It is likely that almost 2 million more workers will become unemployed in 2022-23. This will raise the unemployment rate to almost 9%.

The two deficit magnitudes related to the budget deficit and the current account deficit projected by the IMF appear to be likely at 6.8% of the GDP and 2.3% of the GDP respectively. The latter will imply a large reduction in the trade deficit, especially by a severe containment of imports.

Given below is a comparison of the projections by the IMF for 2022-23 and our assessment of the likely outcomes.

Overall, the IMF projections are still somewhat optimistic in nature. This may be motivated by the need to understate the negative impact of all reforms and actions implemented as part of the Fund program.

The outlook for 2023-24 as presented by the IMF is even more optimistic and it is fraught with very high level of uncertainty, starting with the likely level of foreign exchange reserves on the 30th of June 2023.

Copyright Business Recorder, 2023