Pakistan’s Economic Woes Far From Over

Pakistan’s Economic Woes Far From Over
The PDM government claims that the Pakistani economy is set on the course of recovery after a turbulent year and a half. Yet, challenges on the macroeconomic front are likely to persist, as the fundamental weakness of the country’s economy makes it susceptible to both internal and external shocks.

Dr. Hafiz A Pasha, Pakistan’s former finance minister, in a recently published policy brief for the BNU Center for Policy Research, expounds on the projected outlook for the economy and the challenges ahead.

The brief provides an overview of the projected economic conditions for the country. It suggests that the country is likely to experience a continuation of severe stagflation, with increasing unemployment and persistently high poverty levels. Revised GDP growth rate is expected to be 2.5%, accompanied by an average inflation rate of 26%. In terms of employment, the projected unemployment rate for Fiscal Year 2023-24 is 9.1%, leading to a high poverty rate of around 38% among the population. The budget deficit is estimated to be 7.5% of GDP for the same period, while the current account deficit is expected to reach approximately $6.5 billion. Furthermore, the government has been given a target by the IMF to raise foreign exchange reserves by $9 billion by the end of FY 2023-24, which indicates a potential need for a new three-year Extended Fund Facility following the Standby Facility.

The status quo

According to a report published by Ktrade in July 2023, Pakistan achieved a surplus of $334 million in its current account balance, marking the fourth consecutive month of surplus. This can be attributed to import restrictions and limitations on capital outflows. In FY23, the annual Current Account Deficit (CAD) experienced a significant decline of 85% to $2.6 billion, which was also influenced by import restrictions.

Regarding inflation, monthly figures remained stable at 38% in May 2023, eventually decreasing to 29.2% in June 2023 due to the high-base effect. However, there are potential risks to the inflation outlook due to recent developments such as revised energy and fuel pricing, currency depreciation, and increased general taxation.
Revised GDP growth rate is expected to be 2.5%, accompanied by an average inflation rate of 26%. In terms of employment, the projected unemployment rate for Fiscal Year 2023-24 is 9.1%, leading to a high poverty rate of around 38% among the population.

The State Bank of Pakistan (SBP) decided to maintain the policy rate at 22% in the latest Monetary Policy Statement (MPS). This decision was based on factors including a peak in inflation, improved external account conditions, and enhanced investor confidence. Given the projected inflation trend, it is believed that interest rates have reached their peak.

After initially strengthening following the release of the IMF tranche, the Pakistani Rupee experienced a reversion back to its pre-IMF levels due to increased demand caused by eased imports.

Pasha’s outlook

Dr. Hafiz A Pasha, in his policy brief, highlights that the IMF has set a target to increase foreign exchange reserves by $9 billion by the end of the fiscal year 2023-24, which would cover around 1.4 months of imports. Consequently, there is a need for a new three-year Extended Fund Facility following the completion of the Standby Agreement.

However, Dr. Pasha emphasizes that despite these measures, it is expected that the foreign exchange reserves will still be insufficient in 2023-24. This could lead to pressure on the exchange rate and imported inflation. The policy brief also draws attention to the risks associated with severe "stagflation," characterized by rising unemployment rates and persistent high poverty levels. To minimize these risks, it is necessary to employ proactive exchange rate and interest rate policies. Dr. Pasha indicates that the IMF is optimistic about a decrease in the unemployment rate from 8.5% in 2022-23 to 8% in 2023-24.

However, due to the low GDP growth rate of 2.5%, it is expected that the number of unemployed individuals will increase, resulting in a higher unemployment rate of 9.1%. Consequently, the poverty rate in 2023-24 is projected to be high, impacting approximately 38% of the population. Regarding revenue, it is anticipated that the federal and provincial governments will experience significant growth of around 39% in 2023-24. This growth is attributed to proposed taxation measures, including an increase in the sales tax rate to 18%, a rise in the petroleum levy, and higher profits for the State Bank of Pakistan (SBP) due to increased interest rates. Therefore, it is likely that there might be a need for a mini-budget during the course of the Standby Agreement to cover the revenue shortfall.

The writer is a Business and Economy Journalist for TFT and also works as a Financial Analyst. He can be reached at ahtasamahmad@yahoo.com.