SBP maintains growth forecast at 2-3pc range, edging out IMF’s 2pc prediction

KARACHI: The State Bank of Pakistan said the country’s economy will grow 2 – 3 percent this fiscal year, maintaining a forecast that is marginally more optimistic than the International Monetary Fund’s (IMF) prediction.

“The modest economic recovery in H1-FY24 is expected to continue in the second half of FY24,” the SBP said in the State of Pakistan’s Economy Report for the first half of FY24, which it released on Tuesday.

The IMF forecasts a 2 percent growth in Pakistan’s economy for the current fiscal year, indicating a modest rebound from the previous year’s contraction.

Given the improving business confidence, high-frequency demand indications from November 2023, and the likelihood of robust wheat output in FY24, the SBP predicts real GDP growth to be in the range of 2 to 3 percent for FY24.

The real GDP, driven by the agriculture sector, grew by 1.7 percent in July-December FY24.The GDP growth contracted by 0.2 percent in FY23, after growing by 6.2 percent in FY22.

“Going forward, further adjustments in energy prices and fiscal consolidation, warranted for slowing the pace of debt accumulation, may continue to weigh on economic activities. In this context, achieving a higher growth trajectory over the medium to long-run depends on reforms addressing lingering structural issues,” it said.

The SBP's estimate of economic growth is in line with the forecast it provided in October as part of its annual assessment of the national economy. In the staff report that was made public last week in the wake of the second and final review conducted under the stand-by arrangement, the IMF stated that, given the ongoing recovery in the second half of the fiscal year, growth of two percent is anticipated in FY24.

The SBP’s report was released a day after an IMF mission began negotiations in Islamabad for a new long-term loan programme, following Pakistan's completion of a $3 billion stand-by arrangement last month. June 6 is the date of the next fiscal year's budget session. The recommendations of the government team and the IMF will be crucial in formulating the budget. The nation is expected to finalize the IMF deal by July 2024, according to a recent report from Citibank. The programme would amount to $8 billion over the next four years.

Inflation is expected to remain on a downward trajectory despite uncertainties persisting in both the domestic economy and the international commodity market, it said in a statement.

Keeping these developments in view, the SBP projects the average inflation to be in the range of 23.0 – 25.0 percent for FY24, lower than 29.2 percent in FY23, and is expected to come down to the 5 – 7 percent range by September 2025. On the external account, the CAD is projected to remain lower than earlier estimates, amid a slightly improved global outlook and domestic growth prospects to boost foreign exchange earnings from exports and remittances.

The SBP projects the current account deficit to be in the range of 0.5 – 1.5 percent of GDP for FY24. This macroeconomic outlook remains susceptible to escalating geopolitical tensions, unfavorable weather conditions, adverse movements in global oil prices, and subsequent external account pressures.

The report stated that despite some improvement in macroeconomic indicators, the economy continues to grapple with structural bottlenecks. The major issues include limited savings, low investments in physical and human capital, weak productivity, stagnant exports, a narrow tax base, and inefficiencies in PSEs.

Additionally, political uncertainty exacerbates the situation through inconsistency in economic policies, weak governance, and public administration, hindering investment and thus economic development. These underscore the need for policy reforms to ensure sustainable development over the medium to long-term.

The SBP’s report stated that interest payments as a percent of GDP increased to 4 percent in July-December FY24 from 3.7 percent a year earlier.Besides, the interest payments as a percent of total revenue rose to 61.6 percent in the first six months of FY24, compared with 59.1 percent in the same period last year.

The primary balance posted a higher surplus during H1-FY24 on account of strong growth in revenue that outpaced the increase in non-interest expenditure, the report said.“However, the fiscal deficit remained marginally higher during H1-FY24 compared to the same period last year, primarily due to a sharp rise in interest payments,” it said.

“Non-interest expenditure also rose due to increased disbursement of power subsidies, grants for settlement of contingent liabilities pertaining to Public Sector Enterprises (PSEs), and higher expenses for running of the civil government, defense, and pensions.”