KARACHI: The State Bank of Pakistan (SBP) has said that a host of structural impediments continue to pose challenges to sustaining macroeconomic stability.
According to SBP’s annual report “The State of Pakistan’s Economy” for the last fiscal year (FY24) issued on Thursday, falling investment amid low savings, unfavourable business environment, lack of research & development, and low productivity, alongside climate change risks continue to constrain the economy’s growth potential.
The Report highlights that longstanding inefficiencies in the energy sector have resulted in the accumulation of the circular debt. “While the government has started to address energy sector challenges through substantial price adjustments, there is a need to broaden the scope of these efforts by introducing sectoral policy and regulatory reforms”, it said.
Political uncertainty impacting Pakistan economy, says SBP
These reforms are also necessary to address the issue of inefficiencies in the State-owned Enterprises (SOEs) that continue to be a drain on fiscal resources, which are already constrained by low tax-to-GDP ratio, the report added.
The increase in domestic agricultural productivity also contributed to relatively better macroeconomic outcomes during the last year and posted a GDP growth of 2.5 percent in FY24, the Report added.
At the start of FY24, the economy was grappling with a host of macroeconomic challenges. Although on a declining path, inflation was still hovering around 30 percent. The aggressive adjustments in energy tariffs, which were started in FY23 and continued into FY24, somewhat slowed the pace of disinflation during the year.
On the other hand, artificial wheat shortages added to price pressures in the domestic market, despite an increase in its production in FY23. Although the Stand-By Arrangement (SBA) with the IMF in June 2023 had addressed near-term challenges, declining but elevated uncertainty and speculative activity-maintained pressures in the FX market during initial months of FY24.
The real GDP registered a moderate agriculture-led recovery in FY24. A record harvest of wheat and rice, and a rebound in the production of cotton mainly provided a boost to agricultural output during FY24.
The Report highlights that despite a recovery in real economic activity, the current account deficit further narrowed to a 13-year low as strong growth in remittances and exports more than offset a slight increase in imports.
This, coupled with the Stand-By Agreement with the IMF that catalysed inflows from other multilateral and bilateral sources, helped in the build-up of FX reserves and calming sentiments in the foreign exchange market. The gradual exchange rate appreciation during the year, together with higher-than-envisaged fiscal consolidation, led to a notable decline in public debt to GDP ratio in FY24.
The Report notes that the SBP maintained a tight monetary policy stance by keeping the policy rate unchanged at 22 percent for almost the entire FY24. The SBP also introduced reforms in foreign exchange companies, following administrative actions by the government to bring order in foreign exchange and commodity markets. The government continued the fiscal consolidation, with the primary balance posting a surplus for the first time in 17 years.
These, together with the decline in global commodity prices amid improved global economic activity and trade, had positive bearings on key macroeconomic indicators, the Report highlighted.
The inflation dropped from its peak of 38 percent in May 2023 to 12.6 percent in June 2024. It averaged at 23.4 percent during FY24, considerably lower than 29.2 percent in FY23. A consistent decline in headline and core inflation in the latter half of FY24, created room for the SBP to reduce the policy rate by 150 basis points to 20.5 percent in June 2024.
The Report has also included a special chapter on ‘Reforming SOEs in Pakistan’ that sheds light on the country’s historical and current experience of SOE reforms. The chapter also suggests measures for a successful reform agenda, based on international best practices.
In addition to necessary focus on sectoral policy, these also include effective implementation of the recently introduced corporate government reforms, creating a competitive environment, ensuring effective regulation, supported by broad political consensus, the report said.
According to the Report the continuation of fiscal consolidation efforts and the lagged impact of tight monetary policy stance are anticipated to further weaken the inflationary pressures in FY25.
Copyright Business Recorder, 2024