The country’s macroeconomic situation had
begun to deteriorate since the second half of FY22 in the aftermath of the
Russia-Ukraine conflict, elevated global commodity prices and an unplanned
fiscal expansion. The situation worsened during FY23 owing to floods, delay in
the completion of the 9th review of the IMF’s Extended Fund Facility (EFF)
program, continuing domestic uncertainty, and tightening global financial
conditions.
Particularly, the devastating monsoon
floods significantly dented economic activity, fueled inflationary pressures,
increased stress on external account and widened fiscal imbalance because of spending
on relief efforts. Similarly, the uncertain global economic and financial
conditions, softening – but still elevated – global commodity prices, higher
debt servicing and reduced external inflows had implications for various
sectors of the economy.
The confluence of these developments
substantially weakened Pakistan’s macroeconomic performance during FY23. The
real GDP growth fell to the third-lowest level since FY52, whereas average
National CPI inflation spiked to a multi-decade high. While the current account
deficit narrowed considerably, limited foreign inflows kept pressures on the
external account leading to a decline foreign exchange reserves. Meanwhile,
reflecting the unsustainable fiscal policy stance of the past many years, a
sharp increase in interest payments, persistently large energy subsidies and
lower-than-targeted tax collection contributed to less than envisaged fiscal
consolidation during FY23.
The report notes that Pakistan’s economic
performance in FY23 highlights the importance of addressing perennial
structural impediments that pose serious risks to country’s macroeconomic stability.
Foremost among these are inadequate and slow tax policy reforms that have
constricted the resource envelope, even for meeting current expenditures. On
the other hand, inefficiencies in public sector enterprises (PSEs) led to a
permanent drain on fiscal resources. These have squeezed
space for development spending required to
enhance the economy’s productive capacity. The anemic investment in physical
and human capital as well as R&D has impeded development of a technology-intensive
manufacturing base and the next level value-added exports. Moreover, stagnant
crop yields and lack of attention to development of food supply chain and to
address food market imperfections have led to sustained reliance on imported
food commodities. These trends underpin the unsustainable current account
balance, which has increased the country’s vulnerability to global supply
shocks.
The report indicates that this situation
requires initiation of broad ranging reforms to address various sectoral
imbalances to ensure availability of resources for economic growth and
development.
Specifically, expediting tax policy reforms
and speedy implementation of governance reforms in PSEs is instrumental to
create fiscal space for public investment in human and physical capital.
Furthermore, there is also a need to create
a conducive environment to support foreign direct investment in exportable sectors,
and to encourage technology transfers. Similarly, agriculture sector reforms
are required to alleviate import reliance and for achieving price stability.
There is a need to expedite these reforms to achieve a high and sustainable
economic growth required to absorb the new entrants in labor market, improve
social welfare and raise the general standard of living in the country.
In this context, the availability of
factual information on key macroeconomic variables, markets, businesses, and
individual welfare are important ingredients for evidence-based policy making.
This report includes a special chapter on the need to streamline the state of
Pakistan’s National Statistical System (NSS) and identifies some suggestions
for NSS reforms.
The report highlights that Pakistan’s
economic situation has started to show some early signs of improvement. The
country was able to secure a US$3.0 billion Stand-By Arrangement (SBA) from IMF,
towards the end of FY23, which helped in alleviating near-term risks to
external sector. The high
frequency indicators are suggesting
bottoming out of economic activity from July 2023. The withdrawal of guidance
on import prioritization, alongside gradual ease in foreign exchange position,
is expected to somewhat ameliorate supply chain situation and lift growth in
LSM as well as exports. Moreover, an expected rebound in cotton and rice
production will support agriculture growth in FY24. Reflecting these
considerations, the SBP expects real GDP growth in the range of 2–3 percent in
FY24.
The lagged impact of monetary tightening,
and other contractionary measures, is expected to keep domestic demand in
check. Furthermore, the prospects of improvement in supply situation on account
of likely increase in production of important crops and imports is expected to
bring down inflation in the range of 20–22.0 percent in FY24. 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, SBP projects the current
account deficit to fall in the range of 0.5–1.5 percent of GDP in FY24.
