KARACHI: Despite some improvement in macroeconomic indicators, the economy continues to grapple with structural bottlenecks, while political uncertainties and inconsistent policies exacerbate the situation, said the State Bank of Pakistan (SBP) on Tuesday.

In its six-monthly report on ‘The State of Pakistan’s Economy, the central bank said the major issues include limited savings, low investments in physical and human capital, weak productivity, stagnant exports, narrow tax base, and inefficiencies in public sector enterprises (PSEs).

“Additionally, political uncertainty exacerbates the situation through inconsistency in economic policies, weak governance and public administration, hindering investment and thus economic development,” said the report, adding that these underscore the need for policy reforms to ensure sustainable development over the medium to long-term.

The SBP projected the average Consu­mer Price Index (CPI) inflation in the range of 23-25 per cent for FY24, lower than 29.2pc in FY23, and is expected to come down to 5-7pc range by September 2025.

Forecasts GDP growth at 2-3pc and inflation 23-25pc in FY24

Despite subdued domestic demand and a decline in global commodity prices, lingering structural issues, rupee depreciation compared to H1-FY23, an increase in government spending, and supply shocks kept the National CPI (NCPI) inflation at elevated levels.

“A number of factors, including higher input costs, increase in indirect taxes, and implementation of upward revision in minimum wage announced in the FY24 budget, alongside the second-round effects of administered prices of food and energy items, were responsible for the persistence in the core inflation during H1-FY24,” said the report.

According to the report, real economic activities moderately recovered from last year’s contraction, while the Stand-By Arrangement (SBA) with the IMF helped reduce stress on external accounts.

The SBP expects a continuation of modest economic recovery in the second half of FY24. Against the backdrop of improvements in business confidence, high-frequency demand indicators since November 2023, and prospects for good wheat production during FY24, the SBP projects real GDP growth in the range of 2-3pc for FY24. The NCPI inflation, on the other hand, is expected to remain on a downward trajectory despite uncertainties persisting in both the domestic economy and international commodity market, it said.

On an external account, the current account deficit (CAD) is projected to remain lower than earlier estimates amid a slightly improved global outlook and domestic growth prospects that will boost foreign exchange earnings from exports and remittances. The SBP projects the CAD to be 0.5- 1.5 pc of GDP for FY24.

“This macroeconomic outlook remains susceptible to escalating geopolitical tensions, unfavourable weather conditions, adverse movements in global oil prices, and subsequent external account pressures,” said the report, adding that the further adjustments in energy prices and fiscal consolidation — warranted for slowing the pace of debt accumulation — may also weigh on economic activities and inflation.

Meanwhile, the CAD narrowed considerably amid continued contractionary monetary and fiscal policies, better agricultural production and ease in global commodity prices, said the report.

Published in Dawn, May 15th, 2024

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