Economic Update and Forecast
Since imposing a general lockdown in response to the first wave of COVID-19, Pakistan has been actively using local lockdowns to limit the spread of the infection, which has largely allowed economic activity to continue. The expansion of the national cash transfer programme, the mass vaccination campaign, accommodative macroeconomic policies and measures to support the financial sector have helped mitigate the negative effects of the pandemic. As a result, real GDP growth at constant factor prices recovered between 2015 and 2016 to 5.6% in FY21, after contracting 1.0% in FY20.
However, long-term structural weaknesses in the economy and low productivity growth pose risks to a sustainable recovery. Strong aggregate demand pressures, in part due to previous accommodative fiscal and monetary policies, combined with a less favorable external environment for exports, contributed to a record trade deficit, hurting the rupee and straining the country's foreign reserves.
During July-December 2021 (first half of FY22), indicators mostly indicated positive economic momentum. With the continuous improvement in the mobility of society and the continuation of strong flows of official remittances, it is estimated that private consumption will be boosted. Similarly, investment is also expected to rise on strong growth in machinery imports and government development spending. Government consumption has also grown strongly with the purchase of the vaccine. On the production side, agricultural production increased, especially rice and sugar cane, reflecting better weather conditions. Similarly, large-scale manufacturing growth rose to 7.5% year-on-year in the first half of FY22, up from 1.5% in the first half of FY21. businesses and consumers has declined since June 2021, due to In part due to concerns about rising inflation and interest rates.
Headline inflation rose to an annual average of 9.8% in the first half of FY22 from 8.6% in the first half of FY21, driven by higher global commodity prices and a weak exchange rate. Similarly, the core inflation rate has risen since September 2021. As a consequence, the State Bank of Pakistan eased its expansionary monetary stance from September 2021, raising the policy rate by a cumulative 275 basis points and reserve requirements of bank cash by 100 bp.
The current account deficit (CAD) widened in the first half of FY22 to $9 billion, from a surplus of $1.2 billion in the first half of FY21, as the value of imports increased by 54, 4%, which doubled the growth of export values by 27.3%. Double-digit growth in remittances in the first half of FY22 helped finance the record trade deficit. The financial account recorded net inflows of US$10.1 billion, supported by the new allocation of Special Drawing Rights from the IMF, short-term government deposits from Saudi Arabia, and the issuance of international bonds in July 2021. From January to February, the government obtained $2.1 billion from US international instruments and the International Monetary Fund's Extended Funds Facility (EFF). Despite these inflows, foreign exchange reserves fell to $13.5 billion as of March 25, 2022, equivalent to two months of imports of goods and services. Meanwhile, the rupee depreciated 14.3% against the US dollar from July 2021 to the end of March 2022.
Despite the higher growth of fiscal revenues with the increase in imports, the fiscal deficit widened by 20.6% in the first half of fiscal year 22 due to the increase in spending on the acquisition of vaccines and the liquidation of arrears in the energy sector and development projects. Public debt, including guaranteed debt, reached 70.7 percent of GDP at the end of December 2021, compared to 72.0 percent at the end of December 2020. To complement the tighter monetary policy, the The government passed the supplemental funding bill in January 2022 and withdrew tax breaks, federal development spending cuts, while protecting social sector spending.
With economic recovery and improved labor market conditions, it is estimated that poverty measured at the lower-middle income poverty line of $3.20 per Day 2011 PPP has decreased from 37.0% in FY2020 to 34.0% in FY21. Higher food and energy inflation is expected to reduce the real purchasing power of households, disproportionately affecting poor and vulnerable households that spend a larger part of their budget on these items. In response, the government introduced a targeted food subsidy program (Ehsas Rashan Rayat) in February 2022.
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| Pakistan's economy |
Due to a higher base effect, recent macroeconomic tightening measures, and stronger inflation, real GDP growth is expected to slow to 4.3% in FY22 and 4.0% in FY23. But after that, economic growth is expected to recover to 4.2%. in FY24, supported by the implementation of structural reforms to support macroeconomic stability and dissipate global inflationary pressures. Estimated inflation will rise to 10.7 percent in FY22, but will moderate over the expectations horizon. Largely reflecting the surge in imports in the first half of FY22, the Canadian dollar is expected to expand to 4.4 percent of GDP in FY22. Macroeconomic Adjustment
Stocks and a weaker currency are expected to dominate Imports mainly in FY23. The Canadian dollar is expected to decline to 3.0 percent of GDP in FY24, as reforms to reduce import tariffs and the anti-export bias for trade policy take hold. impulse. The fiscal deficit (including subsidies) is expected to widen slightly to 6.2% of GDP in FY22 and gradually narrow over the medium term as revenue mobilization measures continue, notably GST harmonization and tax reform. Public debt as a share of GDP is expected to remain high, but gradually decline over the medium term. Expectations are based on the IMF-EFF program continuing to run.
Macroeconomic risks are heavily skewed to the downside. They include a faster-than-expected tightening of global financing conditions, a further rise in global energy prices, and the potential risks of a return to severe COVID-19-related mobility restrictions. At the national level, political tensions and policy drift can also lead to protracted macroeconomic imbalances.
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