The economy in FY2023-24

The economic prospects for Pakistan in 2023-24 have been presented in the Annual Plan prepared by the Planning Commission. This Plan has been approved by the National Economic Council, chaired by the Prime Minister.

The Plan initially states that the year, 2023-24, will continue to be challenging as was 2022-23. The revival of growth, according to the Plan, will depend on the following:

‘Political and macroeconomic stability, external account improvement, supportive monetary and fiscal policies and expected fall in the global oil and commodity prices.’

Despite the above pre-conditions, the GDP growth rate in 2023-24 is projected to recover to 3.5 percent, with expected contribution to growth by different sectors in a remarkably balanced manner as follows:

=======================
             Growth (%)
=======================
Agriculture         3.5
Industry            3.4
Services            3.6
GDP                 3.5
=======================

The projected GDP growth rate of 3.5 percent coincides with the IMF’s projection in the latest World Economic Outlook. However, in a more recent projection, the World Bank has presented an estimate of 2.5 percent as the likely growth rate in 2023-24.

There is a problem to start off with the base year, 2022-23, estimates of the GDP. The PBS (Pakistan Bureau of Statistics) has derived the growth rate of the economy in 2022-23 at 0.29%. However, there is the likelihood that the impact of the floods has been significantly understated. Also, the severe restrictions placed on imports have impacted on the level of production in different sectors, especially large-scale manufacturing. This sector contracted by as much as 25% in March 2023.

However, if in subsequent estimates the GDP growth in 2022-23 turns out to be negative, then this could have either positive or negative implications for economic growth in 2023-24. On the positive side, there would be a low base effect thereby raising the growth rate in 2023-24. However, a negative growth rate in 2022-23 will indicate that the economy is continuing to face severe constraints of the type identified above, which could limit the growth prospects.

The most worrying feature of the economy in 2022-23, besides the floods, was the emergence of a severe foreign exchange constraint. Foreign exchange reserves which were $9.8 billion at the start of the year have declined to $3.9 billion by the beginning of June 2023. They are not even adequate to provide import cover for one month.

The precipitous decline in foreign exchange reserves has led to the imposition of strong physical controls on imports. They have declined in dollar terms by over 29 percent in the first 11 months of 2022-23. Consequently, shortages have emerged in the availability of key raw materials and intermediate goods, which have severely restricted the growth rate of the economy.

The reality is that the year, 2023-24, will start with a perilously low level of foreign exchange reserves. The prospects of some build-up have been worsened by the end of the IMF programme on the 30th of June. This will reduce access to even loans from multilateral agencies. Consequently, there will be a need for even stronger controls on imports so that the current account is balanced or even positive.

The likelihood for a re-entry into an IMF programme will be determined by when elections are held and if and when the successor government decides to negotiate a new three-year Extended Fund Facility. The earliest that this could happen is in the second quarter of 2023-24.

Therefore, the prospects for the initial part of 2023-24 are clearly very negative. Sectors like large-scale manufacturing, construction, wholesale and retail trade, and transport could continue to experience negative growth rates in output and value added. Overall, the GDP growth rate could be significantly negative during these early months of 2023-24.

The Planning Commission has kind of side-stepped on this problem by resorting to positive balance of payments projections for 2023-24. Accordingly, the following projections have been made:

(i) Exports which have been falling in 2022-23 are expected to stage a big comeback in 2023-24 and exhibit a significant growth rate of 7.2 percent, at a time when there is an ongoing slowdown in world trade.

(ii) Remittances which have also been declining in 2022-23 will also go back to growth in 2023-24 of 8.5 percent.

(iii) Net foreign direct investment which had virtually ceased at only $200 million due to risk perceptions of Pakistan will start flowing in once again and approach $2.8 billion in 2023-24, even higher than the level in 2021-22, a high growth year.

(iv) Despite near default credit rating of Pakistan, the Annual Plan for 2023-24 also expects Pakistan to be able to achieve portfolio investment of $1.8 billion, especially by flotation of Euro and Sukuk Bonds.

(v) There will also be a net inflow into the general government account of $1.9 billion, despite external debt repayments of $11.4 billion.

Overall, the balance of payments will have a surplus in 2023-24, according to the projections in the Annual Plan.

The above projections create a very false sense of complacency about the growth prospects for Pakistan, which will apparently not face any foreign exchange constraint in 2023-24 and the target growth rate of 3.5 percent can be easily achieved.

This complacency is also reflected in the budget estimates for 2023-24 with tax revenues projected to grow by 28 percent and non-tax revenues by over 87 percent. This will provide the financial cover to a doubling of the size of the federal PSDP in 2023-24 and enhance thereby the role of the Planning Commission.

The Planning Commission ought to have clearly highlighted the grim situation that the economy of Pakistan is in. This would have justified a strong agenda of reforms endorsed by the National Economic Council. It would have enabled the presentation of a realistic budget for 2023-24 with wide-ranging progressive taxation, fundamental steps to downsize the federal government and drastically reduce the big financial burden imposed by loss-making state-owned enterprises.

These reforms would have strengthened public finances in a sustained manner and improved Pakistan’s medium-run growth prospects.

Copyright Business Recorder, 2023