Slow growth, rising inflation: SBP projects a double whammy for country

KARACHI: The State Bank of Pakistan (SBP) has revised the GDP growth estimate downward side and projected below 2 percent growth during this fiscal year (FY23) due to weakened performance of LSM and agricultural sector.

According to SBP’s half yearly (July-December FY23) report “The State of Pakistan’s Economy”, the demand management measures and floods in 2022 have weighed heavily on the country’s growth outlook for FY23.

Sales volumes of automobiles, POL, and cement recorded a significant decline in first half of this fiscal year (H1FY23). In agriculture sector, rice and cotton crops were severely damaged, while the LSM output fell by 3.7 percent.

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“Therefore, real GDP growth in FY23 is expected to remain significantly not only lower than the previous year’s growth rate of 6 percent, as well as the SBP’s revised projection of around 2 percent”, the report said.

Eelier this year, the SBP estimated that the GDP growth will be range of 3-4 percent by end of FY23. However, SBP in its annual report for the fiscal year 2022, issued in December 2022, revised the projection and estimated that the real GDP growth will below range of 3-4 percent for FY23. Now the SBP’s projection has further reduced to below 2 percent because of lower LSM and agricultural output.

The report said that the lower GDP reflects a broad-based moderation in economic activity in the wake of dampened performance of both agriculture sector and industrial output, with its negative spillovers for the services sector.

Meanwhile, the anticipation of further slowdown in economic activity amid monetary tightening and other demand curtailing measures is likely to decelerate the current growth momentum of tax collection, thus, widening the fiscal deficit.

The SBP said that in view of the prevailing domestic macroeconomic uncertainty, impact of flood, and increasing interest rate environment globally, the external account vulnerabilities are likely to remain at an elevated level in FY23. However, the resumption of IMF’s EFF program would help assuage the overall external sector concerns by increasing access to multilateral and bilateral financing avenues.

The downside risks to the external sector outlook are: sharper than expected slowdown in global demand that could impact exports and workers’ remittances negatively. Likewise, global and domestic uncertainty also poses downside risks. On the upside, more than expected slowdown in domestic demand or relatively sharp fall in global commodity prices, could improve the current account deficit, the report said.

The SBP also projected that National Consumer Price Index (NPCI) inflation to remain elevated within the range of 27-29 percent in FY23. The deteriorating inflation outlook is predominantly ascribed to the persistent uptick in food and energy inflation, while core inflation may continue to edge up as well.

“The near-term risks to inflation outturns could be explained by various factors: the second round impact of recent exchange rate depreciations, fiscal adjustments including upward revisions in GST, gas and electricity tariffs, and an upward drift in inflation expectations”, the report maintained.

In addition, uncertainty regarding crude oil price increase due to faster than expected growth in Chinese economy and lower than target wheat production in Pakistan are other upside risks to the inflation outlook.

On the fiscal side, the deceleration in FBR tax collection on account of temporary import restrictions and subdued economic activity, alongside sharp growth in current expenditures driven by higher interest payments on public debt during H1-FY23 have caused narrowing of the fiscal space. As a result, the contraction in federal development expenditures to contain deterioration in fiscal position has posed challenges for FY23 economic outlook.

Despite a substantial improvement in CAD by US$ 5.5 billion during the first half of FY23, the external account pressures continued to persist amidst scheduled debt repayments and markedly lower foreign inflows which, in turn, resulted in a severe drawdown in foreign exchange reserves.

Nonetheless, the report said that both the government and the SBP have been undertaking policy measures to tackle the current economic challenges and the government has rationalized expenditures through contraction in subsidies and grants, and has introduced additional revenue mobilization measures in February 2023 aimed at fiscal consolidation.

The SBP, on the other hand, has increased policy rate by 625 basis points during 9MFY23, taking the total rate hike to 1300 basis points during the current cycle of monetary tightening.

Going forward, this policy mix, alongside necessary structural reforms to moderate the impact of various supply shocks, would help anchor inflationary expectations in the medium term, and put the economy on a more sustainable growth path, the SBP report said.

State Bank of Pakistan said on Friday GDP growth was likely to remain significantly lower for financial year 2022-23 than the previous year, with highly elevated inflation.

The forecast came in the bank’s half-year report, which said Pakistan’s macroeconomic conditions had deteriorated due to the global economic situation, uncertainty over an IMF programme, forex constraints, political instability and flash floods.

It gave no new figures for growth on Friday. In October, the bank revised GDP growth this fiscal year ending in June to 2%, down from the 5% estimated in the annual budget in June 2022. This year, it said, growth will remain below the revised projection. The International Monetary Fund (IMF) said in April that the figure would be 0.5%.

Pakistan is facing its worst ever economic crisis. Critical IMF funding needed to avert a balance of payment crunch has been delayed for months as the central bank’s reserves have shrivelled to cover only a month of controlled imports. The central bank report said the contraction in federal development expenditures in keeping with the deterioration in Pakistan’s fiscal position had posed challenges for the FY23 economic outlook.

Pakistan posted highest ever inflation at 36.4% in April and its currency has depreciated to a historic low, after IMF talks began in February to stabilise its market-based exchange rate.

“Despite visible contraction in domestic demand, inflation ... has remained stubbornly persistent,” the report said.

IMF conditions to resume funding stalled since November have included painful fiscal adjustments such as withdrawals of subsidies, increases in electricity, gas tariffs and oil prices, and arranging external financing.

The IMF has withheld disbursement of a $1.1 billion tranche of the $6.5 billion bailout agreed in 2019.

Copyright Business Recorder, 2023