ISLAMABAD: While slashing down the GDP growth projection to 3.5 per cent, the Asian Development Bank has highlighted major risks to the economy, saying that Pakistan’s medium-term prospects hinge critically on the restoration of political stability and deepening of reforms under the revived IMF programme.
The Asian Development Bank (ADB) has projected that inflation might hover around 18 per cent for the current fiscal year 2022-23. “This update substantially revises up the forecast for headline inflation for FY2023 to 18.0% from the earlier 8.5% projection due to a potentially strong second-round impact from the rupee’s depreciation and fuel and energy price adjustments,” it added.
The Asian Development Outlook (ADO) released by the ADB stated that the continued implementation and deepening of reforms under the revived IMF’s Extended Fund Facility (EFF) programme was critical to stabilise the economy and rebuild fiscal and external buffers. “The economic outlook will also depend on the continued availability of adequate external financing under challenging domestic and global economic and political conditions. The potential economic consequences of the recent severe floods heighten the already significant risks to the outlook, including the elevated inflation rate, possible fiscal slippage as general elections approach, and a higher-than-projected increase in global food and energy prices,” the ADB warned.
According to the ADB, on August 29, 2022, the IMF revived and augmented the Extended Fund Facility (EFF) programme aimed at restoring macroeconomic stability. This allowed an immediate disbursement of $894 million in special drawing rights (about $1.1 billion), bringing total purchases for budget support under the arrangement to about $3.9 billion. In addition, the IMF extended the arrangement to the end of 2023 and augmented access by $720 million in special drawing rights, bringing total potential purchases under the EFF to about $6.5 billion.
It is hoped that economic reforms in the programme will catalyse significant international financial support and promote sustainable and balanced growth. The government has implemented key measures to sharply reduce fiscal and quasi-fiscal deficits. These include an ambitious revenue mobilisation effort to generate 1% of the GDP in additional taxes, while also ensuring cost recovery in the energy sector.
To anchor inflationary expectations to the medium-term inflation target, the central bank raised its policy rate by a cumulative 675 BPS to 13.75% at the end of FY2022 and by another 125 BPS to 15.00% in July. The central bank also introduced measures to curtail imports and ease pressure on the rupee. These include requiring prior approval from the central bank for importing disassembled automobiles for reassembly and for all types of machinery under Chapters 84 and 85 of the Harmonized System Classification Codes, introducing a 100% cash margin requirement on imports of several items and prohibiting consumer financing for imported automobiles. The continued exchange rate flexibility will help absorb external shocks and support the rebuilding of foreign exchange reserves.
This update revises down the growth forecast for FY2023 to 3.5% from the 4.5% projection made in April 2022, as economic activity will be curtailed by ongoing stabilisation efforts to tackle sizeable fiscal and external imbalances. The fiscal consolidation, apart from relief for flood damage, and monetary tightening are expected to suppress domestic demand. A contraction in demand, together with capacity and input constraints created by higher import prices from the rupee’s large depreciation, will reduce industry output. The agriculture growth is expected to moderate on high input costs including electricity, fertilisers and pesticides.
Slower growth in agriculture and industry will in turn diminish services growth, particularly wholesale and retail trade. Inflation is expected to accelerate in FY2023 as new tax measures announced in the budget, together with an increase in the wheat support price and planned upward adjustments to electricity tariffs, are expected to keep inflationary pressures high. The year-on-year consumer price index inflation rate was at 24.9% in July 2022.
On June 29, the parliament approved the FY2023 budget consistent with the EFF programme targets that aims for a primary surplus equivalent to 0.4% of the GDP for the fiscal year. The fiscal deficit is expected to decline to 4.9% of the GDP through a mix of ambitious revenue mobilisation efforts and subsidy cuts. The revenue growth is expected to increase, underpinned by the new tax measures in the Finance Act 2022, the resumed collection of the petroleum levy, a renewed focus on curtailing tax expenditure and additional policy and administrative measures to broaden the tax base.
Expenditure is projected to decline in FY2023 as a percentage of the GDP, led by a 1.4 percentage point of the GDP cut in budgeted subsidies. The government aims at preserving social and development spending to protect the vulnerable and limit the slowdown in growth amid efforts to stabilise the economy. The government has already raised domestic fuel prices to bring them in line with international oil prices and is undertaking a phased withdrawal of electricity and gas subsidies, which will contribute to higher inflation in FY2023.
The current account deficit is forecast to narrow to 3.0% of the GDP in FY2023, unchanged from ADO 2022’s projection, on a sharp slowdown in economic growth, measures to curtail nonessential imports and the pass-through effect of the rupee’s large depreciation against the dollar.
Exports and remittances are expected to remain resilient in FY2023, supported by improved confidence, a flexible exchange rate, the continuation of the central bank’s export facilitation scheme and government initiatives to reduce the cost of doing business.
While foreign capital inflows are expected to increase, financing challenges will remain given the large sums needed to cover the current account deficit and service debt repayments. Maturing external public debt will be at about $21 billion in FY2023. The foreign direct investment should revive as investor confidence is restored by the implementation of the IMF stabilisation and reform programme. This should also help bring additional finance from multilateral institutions and other international partners, thus supporting the buildup of foreign exchange reserves, the report concluded.
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