As per The State of Economy Report 2021-22 released by State
Bank of Pakistan, the country’s economic growth is expected to moderate
considerably in FY23. Having delivered a headline growth approaching 6% in
FY22, the country is expected to even miss the revised growth target of 3% to
4% this time round.
In addition, the government has targeted to reduce the
fiscal deficit to 4.9% of GDP in FY23 from 7.9% in FY22, an outcome that would
be achieved through both revenue and expenditure measures. Widening of tax base
through elimination of exemptions, increase in tax rates and reinstatement of
fuel taxes are expected to boost tax receipts. The non-tax revenues is also
expected to improve with the re-imposition of PDL.
It must be kept in mind there can be slippages on the
expenditure with respect to rehabilitation efforts. The IMF is insisting on
higher collection in order to keep the fiscal and primary deficits within
permissible levels. Analysts expect fiscal deficit to hover around 6.5% of GDP,
despite higher tax collection.
This deviation could be due to: 1) higher debt servicing and
2) potential slippages during 2HFY23 owing to election and flood relief related
spending.
Current account deficit situation is expected to improve
beyond the original estimates of 3% of GDP in FY23 due to various demand
suppression measures implemented by the government.
Likewise, commodity prices have also softened which will
reduce the pressure on CAD even further. However, the loss to agriculture
produce, induced by the recent floods, is likely to step up import of
agriculture commodities, especially cotton.
Everyone must keep in mind that Pakistan’s economy is in an
extremely fragile state at present with foreign exchange reserves slipping
close to US$6 billion, barely enough to provide import cover of 1.16 months.
The external debt is reported at US$127 billion, equivalent
to 40% of GDP. Pakistan faces significant challenges on the debt rollover. To
this end, during 5MFY23, the gross inflow (including US$1.2 billion from IMF)
has been only US$4.9 billion, while the amortization payments have been US$4.1 billion.
The market has been jittery and analysts expect the volatility to continue throughout
CY23.
As per the central bank, the recent flooding will impinge
the country’s real economic activity through various channels, where the losses
in agriculture sector arising from the damages to crops and livestock are
likely to reverberate through the rest of the economy.
The current estimates for headline growth are 1.7% while
analysts expect only a limited uptick in growth outlook during FY24, despite a
low base effect, as the central bank would want to keep the indigenous demand
in check to manage external account.
Fiscal side is not much better either. The GoP has targeted
to reduce the fiscal deficit to 4.9% of GDP in FY23 from 7.9% in FY22, an
outcome that would be achieved through a combination of both revenue and
expenditure measures. FY23 has got off to a good start in term of collection
with FBR exceeding its collection targets for 5MFY23.
There is currently an impasse over the IMF talks over the
disbursement of the next US$1.0 billion tranche, with the fund and local
authorities unable to agree on the quantitative targets. Analysts expect fiscal
deficit to clock in at 6.5% of GDP, despite higher tax collection.
The GoP and the central bank are anticipated to keep the
import bill under the wraps beyond FY23 in order to maneuver space on external
front. This may result in interest rates remaining elevated and strict control
of opening of L/Cs. The fallout, which may inevitably come as a result of
adopting this strategy, will be visible in lower headline growth and tax collection.
Analysts anticipate GDP growth to remain subdued beyond FY23.
