ISLAMABAD: Notwithstanding a relatively better global outlook, the International Monetary Fund (IMF) on Tuesday maintained Pakistan’s economic growth prospects for the current fiscal year at two per cent, which it had revised downward in January from its previous estimate of 2.5pc.

In its flagship World Economic Outlook (WEO 2024), released on Tuesday, the IMF kept the country’s growth rate at 3.5pc for the next fiscal year. In January, the Fund had lowered the current year’s growth rate by 0.5pc from 2.5pc and by 0.1pc from 3.6pc for FY25, which it anticipated in October 2023.

The growth estimates are based on the Fund’s recent quarterly review of Pakistan’s macroeconomic position as part of the $3bn Stand-By Arrangement (SBA) on which the two sides reached a Staff-Level Agreement (SLA) on March 20.

The IMF forecast is slightly higher than projections made by its Washington-based cousin — the World Bank — at 1.8pc early this month. The IMF’s growth forecast is significantly lower than the government’s 3.5pc GDP growth target for the current year but generally in line with the State Bank of Pakistan’s expectation of 2pc to 3pc announced last month as part of the Monetary Policy Statement.

Lender lifts global growth forecast to 3.2pc this year

The IMF estimated that Pakistan’s average inflation will decelerate to 24.8pc this year from 29.2pc last year and further slow to 12.7pc in FY25. Also, the Fund projected the current account deficit increasing to 1.1pc of GDP this year from 0.7pc last year and rising further to 1.2pc next year.

On the other hand, the IMF estimated that the unemployment rate would gradually decline from 8.5pc in FY23 to 8pc this year and 7.5pc next fiscal year.

Raises global growth

In the WEO report, the IMF raised the global growth rate for 2024 to 3.2pc, 0.1pc higher than its 3.1pc forecast of January and significantly higher than its October forecast of 2.9pc. “The forecast for 2024 is revised up by 0.1bps from January and by 0.3bps from October 2023”.

The pace of expansion is low by historical standards, owing to both near-term factors, such as still-high borrowing costs and withdrawal of fiscal support, and longer-term effects from the Covid-19 pandemic and Russia’s invasion of Ukraine; weak growth in productivity; and increasing geo-economic fragmentation.

The WEO expected the global headline inflation to fall from an annual average of 6.8pc in 2023 to 5.9pc in 2024 and 4.5pc in 2025, with advanced economies returning to their inflation targets sooner than emerging market and developing economies. The latest forecast for global growth five years from now — at 3.1pc — is at its lowest in decades. The pace of convergence toward higher living standards for middle- and lower-income countries has slowed, implying persistence in global economic disparities, the IMF said.

The relatively weak medium-term outlook reflects lower GDP per person growth stemming, notably, from persistent structural frictions preventing capital and labour from moving to productive firms. It noted that dimmer prospects for growth in China and other large emerging market economies will weigh on the prospects of trading partners, given their increasing share of the global economy.

“Risks to the global outlook are now broadly balanced”, the IMF said but noted on the downside that new price spikes stemming from geopolitical tensions, including those from the war in Ukraine and the conflict in Gaza and Israel, could, along with persistent core inflation where labour markets are still tight, raise interest rate expectations and reduce asset prices.

A divergence in disinflation speeds among major economies could also cause currency movements that put financial sectors under pressure. High interest rates could have greater cooling effects than envisaged as fixed-rate mortgages reset and households contend with high debt, causing financial stress. “In China, without a comprehensive response to the troubled property sector, growth could falter, hurting trading partners”, the WEO warned.

Moreover, amid high government debt in many economies, a disruptive turn to tax hikes and spending cuts could weaken activity, erode confidence, and sap support for reform and spending to reduce risks from climate change. Also, geo-economic fragmentation could intensify, with higher barriers to the flow of goods, capital, and people implying a supply-side slowdown.

On the upside, looser fiscal policy than necessary and assumed in projections could raise economic activity in the short term, although risking more costly policy adjustments later on. Inflation could fall faster than expected amid further gains in labour force participation, allowing central banks to bring easing plans forward. Artificial intelligence and stronger structural reforms than anticipated could spur productivity.

The IMF advocated the near-term priority for central banks to ensure that inflation touched down smoothly, by neither easing policies prematurely nor delaying too long and causing target undershoots as the global economy approached a soft landing.

At the same time, as central banks take a less restrictive stance, a renewed focus on implementing medium-term fiscal consolidation to rebuild room for budgetary maneuver and priority investments, and to ensure debt sustainability, is in order.

“Multilateral cooperation is needed to limit the costs and risks of geo-economic fragmentation and climate change, speed the transition to green energy, and facilitate debt restructuring”, the WEO said.

Published in Dawn, April 17th, 2024

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