Karachi, October 23, 2023 – The State Bank of Pakistan (SBP) has released its Annual Report on the State of Pakistan’s Economy for the fiscal year 2022-23, projecting a GDP growth rate of 2 to 3 percent for the fiscal year 2023-24.
This forecast falls below the government’s target of 3.5 percent, indicating a challenging economic landscape.
One key highlight of the report is the projection of a fiscal deficit at 8 percent, higher than the government’s estimated deficit of 6.5 percent. Additionally, the SBP anticipates that the average annual inflation based on the Consumer Price Index (CPI) will remain around 22 percent, signaling ongoing price pressures.
The report also outlines expectations for the country’s exports and imports, with projections of $29 billion in exports and $52 billion in imports, which are below the government’s previous projections. These numbers emphasize the need for stronger economic performance to meet export targets and control the trade deficit.
The SBP report points out that Pakistan faced numerous challenges during the fiscal year 2022-23. Long-standing structural weaknesses, exacerbated by both domestic and global supply shocks, played a significant role in the economic struggles experienced throughout the year. Factors such as the Russia-Ukraine conflict, rising global commodity prices, an unplanned fiscal expansion, monsoon floods, and delays in the IMF’s Extended Fund Facility (EFF) program review contributed to economic difficulties.
The devastating monsoon floods disrupted economic activities, fueled inflation, strained the external account, and widened the fiscal deficit due to the necessary spending on relief efforts. Uncertainty in global economic and financial conditions, coupled with elevated commodity prices and increased debt servicing, further complicated the economic landscape.
These challenges led to a notable decline in Pakistan’s macroeconomic performance, with real GDP growth hitting its third-lowest level since 1952. The report indicates that average National CPI inflation reached a multi-decade high, while limited foreign inflows affected the external account, causing a decline in the SBP’s foreign exchange reserves. The unsustainable fiscal policy stance, characterized by high interest payments, persistent energy subsidies, and lower-than-targeted tax collection, contributed to a weaker-than-expected fiscal consolidation.
The report underscores the importance of addressing long-standing structural issues, including slow tax policy reforms and inefficiencies in public sector enterprises. These challenges have limited the availability of resources for public investment in critical areas such as human capital and technology-intensive manufacturing. Additionally, stagnant crop yields and a reliance on imported food commodities have contributed to an unsustainable current account balance, making Pakistan vulnerable to global supply shocks.
To navigate these challenges, the SBP suggests initiating comprehensive reforms to address sectoral imbalances. Key reforms include expediting tax policy reforms, implementing governance reforms in public sector enterprises, creating an environment conducive to foreign direct investment in exportable sectors, and encouraging technology transfers. Agricultural sector reforms are also highlighted as a means to reduce import reliance and achieve price stability.
Despite the challenging economic situation, the report notes some early signs of improvement, including securing a US$3.0 billion Stand-By Arrangement from the IMF. High-frequency indicators suggest a potential bottoming out of economic activity, with expectations of increased production in key agricultural crops. The SBP anticipates real GDP growth in the range of 2 to 3 percent for the fiscal year 2023-24. Monetary tightening and other contractionary measures are expected to keep domestic demand in check, with improved supply conditions potentially bringing down inflation.
In summary, the SBP’s report sheds light on Pakistan’s economic challenges and the need for comprehensive reforms to address structural issues. While the economic landscape remains complex, there are expectations of a modest recovery in the upcoming fiscal year, emphasizing the importance of fiscal discipline and economic resilience in the face of external and domestic challenges.
