KARACHI: The State Bank of Pakistan (SBP) expects a broad-based decline in economic activity in the wake of dampened performance of both the agriculture sector and industrial output, with its negative spillovers for the services sector.

In its report on the state of the economy for the first half of FY23 released on Friday, the central bank observed that the demand management measures and 2022 floods weighed heavily on the growth outlook for FY23, adding that the GDP growth is expected to remain below 2pc.

However, the government on April 27 lowered the GDP growth forecast to 0.8pc slightly above 0.4 to 0.6pc projected by the IMF, World Bank and Asian Development Bank for the current fiscal year.

The report said that adverse global economic conditions, uncertainty surrounding the completion of the IMF programme’s 9th review, insufficient external financing and low level of foreign exchange reserves remained major concerns during 1HFY23 which were exacerbated by the fallout of flash floods and political instability.

Inflation at multi-decade highs despite 1,300bps hike in policy rate

Specifically, both agriculture production and Large-Scale Manufac­turing (LSM) contracted whereas headline inflation rose to a multi-decade high level, said the report.

The contraction in federal development expenditures to contain deterioration in fiscal position has posed challenges to FY23 economic outlook, said the SBP report, adding that the anticipation of a further slowdown in economic activity amid monetary tightening and other demand-curtailing mea­s­ures is likely to decelerate the current growth momentum of tax collection, thus, widening the fiscal deficit.

Due to the contraction of fiscal space, the deficit is expected to widen during FY23, said the report.

The deceleration in tax collection on account of temporary import restrictions and subdued economic activity, alongside sharp growth in current expenditures driven by higher interest payments on public debt during 1HFY23 have caused a narrowing of the fiscal space, it added.

The government has rationalised expenditures through a contraction in subsidies and grants, and has introduced additional revenue mobilisation measures in February aimed at fiscal consolidation, said the report.

The SBP, on the other hand, has increased its policy rate by 625 basis points during 9MFY23, taking the total rate hike to 1,300bps during the current cycle of monetary tightening, said the report.

Given the prevailing domestic macroeconomic uncertainty, the impact of flood, and the increasing interest rate environment globally, the external account vulnerabilities are likely to remain at an elevated level in FY23, said the report.

Despite a $5.5bn deceleration in the current account deficit (CAD) during the first half of FY23, the external account pressures continued to persist amidst scheduled debt repayments and markedly lower foreign inflows which, in turn, resulted in a severe drawdown in foreign exchange reserves.

In addition to the delays in the disbursements of the IMF tranches and the political uncertainty, higher net forex outflows on account of scheduled debt repayments and disinvestments added to external account pressures.

The combined effect of these developments, in the backdrop of the US dollar’s appreciation against a basket of global currencies, led to rupee depreciation during 1HFY23, said the report.

The workers’ remittances also declined during 1HFY23, said the report, adding that in addition to the global economic slowdown, an increase in the use of informal channels also affected inflows.

The main inflation is projected to remain elevated within the range of 27-29pc in FY23, said the report. The deteriorating inflation outlook is predominantly ascribed to the persistent uptick in food and energy inflation, while core inflation may continue to edge up as well, the SBP observed.

Published in Dawn, May 20th, 2023

Follow Dawn Business on Twitter, LinkedIn, Instagram and Facebook for insights on business, finance and tech from Pakistan and across the world.

Opinion

Editorial

Silencing the public
Updated 21 Feb, 2024

Silencing the public

Acting as if it is unaccountable, it is now curtailing citizens’ digital rights without even bothering to come up with a justification.
Fitch’s concern
Updated 21 Feb, 2024

Fitch’s concern

It warns that “near-term political uncertainty may complicate the country’s efforts to secure a financing agreement with the IMF to succeed the Stand-by Arrangement”.
Zoo zealotry
Updated 21 Feb, 2024

Zoo zealotry

IN a bizarre twist of faith and fur, the Indian right-wing Hindu nationalist group, Vishwa Hindu Parishad, has...
Open the books
Updated 20 Feb, 2024

Open the books

Irregularities have been so widespread that even otherwise impartial observers are joining the chorus of voices demanding a recount.
BRICS candidacy
Updated 20 Feb, 2024

BRICS candidacy

For Pakistan to successfully join BRICS or compete in other arenas internationally, the political instability at home needs to be addressed.
Pneumonia menace
20 Feb, 2024

Pneumonia menace

PANIC is on the rise as the alarming surge in pneumonia cases has created an explosion of headlines — sans...