ISLAMABAD: While reducing the GDP growth projection to 3.5%, the Asian Development Bank highlighted major risks to the economy, saying Pakistan’s medium-term prospects depend critically on restoring political stability and the deepening of reforms under the renewed IMF program .
The Asian Development Bank (AfDB) has forecast inflation could hover around 18% for the current fiscal year 2022-23. “This update significantly revises the headline inflation forecast for fiscal year 2023 upwards significantly to 18.0% from the previous projection of 8.5% due to a potentially strong second-round impact from the depreciation of the rupee and adjustments in fuel and energy prices,” he added.
The Asian Development Outlook (ADO) released by the AfDB said continued implementation and deepening of reforms under the IMF’s re-launched Extended Financing Facility (EFF) program was key to stabilizing economy and rebuild fiscal and external reserves. “The economic outlook will also depend on the continued availability of adequate external financing in difficult domestic and global economic and political conditions. The potential economic consequences of recent severe flooding add to already significant risks to the outlook, including high inflation, possible fiscal slippage in the run-up to general elections, and a higher-than-expected increase in global food and food prices. energy,” the AfDB said. warned.
According to the AfDB, on August 29, 2022, the IMF revived and scaled up the Extended Financing Facility (EFF) program aimed at restoring macroeconomic stability. This enabled an immediate disbursement of $894 million in special drawing rights (about $1.1 billion), bringing total purchases for budget support under the agreement to about $3.9 billion. dollars. In addition, the IMF extended the arrangement until the end of 2023 and increased access by $720 million in special drawing rights, bringing total potential purchases under the EFF to around $6.5 billion. of dollars.
It is hoped that the program’s economic reforms will catalyze significant international financial support and promote sustainable and balanced growth. The government has implemented key measures to sharply reduce fiscal and quasi-fiscal deficits. These include an ambitious revenue mobilization effort to generate 1% of GDP in additional taxes, while also ensuring cost recovery in the energy sector.
To anchor inflation expectations to the medium-term inflation target, the central bank raised its policy rate by a cumulative 675 basis points to 13.75% at the end of fiscal 2022 and an additional 125 basis points at 15.00% in July. The central bank has also introduced measures to reduce imports and ease pressure on the rupee. These include requiring prior central bank approval for the import of disassembled automobiles for reassembly and for all types of machinery under Chapters 84 and 85 of the Harmonized System classification codes, l introduction of a 100% cash margin requirement on imports of several items and a ban on consumer finance for imported automobiles. Continued exchange rate flexibility will help absorb external shocks and support the rebuilding of foreign exchange reserves.
This update lowers the growth forecast for fiscal year 2023 to 3.5% from the 4.5% projection made in April 2022, as economic activity will be dampened by stabilization efforts in ongoing to tackle large fiscal and external imbalances. Fiscal consolidation, in addition to mitigating flood damage, and monetary tightening are expected to dampen domestic demand. A contraction in demand, as well as capacity and input constraints created by rising import prices resulting from the sharp depreciation of the rupee, will reduce industry output. Growth in agriculture is expected to moderate due to high input costs, including electricity, fertilizers and pesticides.
Slower growth in agriculture and industry will in turn slow growth in services, especially wholesale and retail trade. Inflation is expected to pick up in fiscal 2023 as new fiscal measures announced in the budget, along with an increase in the wheat support price and planned upward adjustments to electricity rates, should keep inflationary pressures high. The one-year consumer price index inflation rate was 24.9% in July 2022.
On June 29, the parliament approved the budget for the financial year 2023 in line with the objectives of the EFF program which aims for a primary surplus equivalent to 0.4% of GDP for the financial year. The fiscal deficit is expected to decline to 4.9 percent of GDP through a combination of ambitious revenue mobilization efforts and subsidy reductions. Revenue growth is expected to increase, supported by new tax measures in the 2022 budget law, the resumption of oil tax collection, renewed interest in reducing tax expenditures, and additional policy and administrative measures to expand the tax base.
Spending is expected to decline in FY2023 as a percentage of GDP, driven by a 1.4 percentage point of GDP reduction in budgeted subsidies. The government aims to preserve social and development spending to protect the vulnerable and limit slowing growth as part of efforts to stabilize the economy. The government has already raised domestic fuel prices to bring them in line with international oil prices and is undertaking a phased removal of electricity and gas subsidies, which will contribute to higher inflation in fiscal year 2023.
The current account deficit is expected to narrow to 3.0% of GDP in FY2023, unchanged from the ADO 2022 projection, due to a marked slowdown in economic growth, measures to reduce non-essential imports and the pass-through effect of the sharp depreciation of the rupee against the dollar.
Exports and remittances are expected to remain resilient in fiscal 2023, supported by improving confidence, a flexible exchange rate, the continuation of the central bank’s export facilitation program, and government initiatives to reduce the cost of business.
While foreign capital inflows are expected to increase, financing challenges will remain given the large sums needed to cover the current account deficit and debt service repayment. External public debt maturing will amount to about $21 billion in fiscal 2023. Foreign direct investment is expected to pick up as investor confidence is restored by the implementation of the stabilization program and IMF reform. It should also help bring in additional funding from multilateral institutions and other international partners, thereby supporting the accumulation of foreign exchange reserves, the report concludes.