Pakistan’s lagging economy has started to show early signs of recovery as the $3 billion loan programme from IMF offered relief to the country’s acute balance of payment crisis
KARACHI: Pakistan’s lagging economy has started to show early signs of recovery as the $3 billion loan programme from the International Monetary Fund (IMF) offered relief to the country’s acute balance of payment crisis, the State Bank of Pakistan said on Monday.
“After a year of turbulence, Pakistan’s economic situation has started to show some early signs of improvement,” the SBP said in its annual report on the State of Pakistan’s Economy for the fiscal year that ended on June 30.
“The country was able to secure a US$ 3 billion Stand-By Arrangement (SBA) from IMF, towards the end of FY23, which helped in alleviating immediate risks to some extent. The initial disbursement of US$ 1.2 billion under the SBA in July 2023, alongside US$ 3 billion bilateral inflows, helped reverse the declining trend in the SBP forex reserves,” it said.
The SBP’s analysts predict a moderate growth in the economy this fiscal year due to the improved outlook for the agricultural sector and the improvement in economic activity. However, they believe that the pace of the economic recovery may be contained by the effects of various demand compression measures implemented in the previous two years.
In its annual report, the SBP expects real GDP growth in the range of 2 to 3 percent in FY24, maintaining the prior projection it made in the monetary policy statement it released last month. The SBP’s projection for GDP growth is in line with the most recent estimate of 2.5 percent from the IMF, but it is just less than the government’s 3.5 percent target. The Asian Development Bank (ADB) has expected growth of 1.9 percent, whereas the World Bank has offered a growth projection of 1.7 percent.
Pakistan’s economy contracted by 0.6 percent in the last fiscal year. “The high-frequency indicators are suggesting bottoming out of economic activity from July 2023,” the SBP’s report said.
“The withdrawal of guidance on import prioritisation, alongside gradual ease in forex position, is expected to somewhat ameliorate supply chain situation and lift growth in LSM as well as exports,” it added.
Moreover, an expected rebound in cotton and rice production will support agriculture growth in FY24, according to the report. The country’s inflation projection for FY24, as projected by the SBP in September, is expected to range between 20 and 22 percent. In FY23, inflation was 29.2 percent.
The lagged impact of monetary tightening and other contractionary measures is expected to keep domestic demand in check, it said. Moreover, prospects of improvement in the supply situation on account of the likely increase in production of important crops and resumption of imports is expected to further moderate inflationary pressures in FY24, it added.
However, unforeseen climate events, adverse movements in global commodity prices, especially oil, and external account pressures are some important upside risks to this outlook, according to the report.
Slightly improved global and domestic growth prospects are expected to bolster foreign exchange earnings from exports of goods and services. Although import volumes are likely to increase, lower commodity prices may prevent a significant expansion in imports bill during FY24.
Accounting for these factors, the SBP projects the current account deficit to fall in the range of 0.5-1.5 percent of GDP in FY24. Although the government has set a budget deficit target of 6.5 percent of GDP for FY24, the SBP anticipates a deficit in the range of 7.0-8.0 percent.
According to the central bank’s report, higher interest payments may continue to prevent a notable reduction in spending during FY24. Non-interest expenditure, however, is expected to remain contained on account of lower subsidies and grants. A tepid recovery in economic activity is likely to shore up revenue collection during FY24.