FeaturedNationalVOLUME 19 ISSUE # 29

Bracing for third successive year of stagnation

Pakistan is on the verge of experiencing its third consecutive year of economic stagnation, with negligible improvement expected in the standard of living for its citizens.

The government’s recent approval of a 3.6% economic growth target and an overly ambitious 12% inflation target for the upcoming fiscal year underscores the challenging economic landscape. The realization of these targets is fraught with dependencies on political stability, currency market equilibrium, and the timely acquisition of a new bailout package.

The government has sanctioned an economic growth target of 3.6% for the forthcoming fiscal year, alongside an overly optimistic inflation target of 12%. Deliberations within the Annual Plan Coordination Committee (APCC) revealed that even modest economic growth and the ambitious inflation target hinge on political stability, currency market equilibrium, and the timely securing of a new bailout arrangement. The APCC ratified the annual blueprint for the fiscal year 2024-25, highlighting that the rupee and foreign exchange reserves would be strained by “scheduled external debt repayments.”

The APCC, the entity charged with endorsing the macroeconomic framework, proposed a 3.6% Gross Domestic Product growth and 12% inflation targets for final approval by the National Economic Council (NEC). Per the SBP Act, the federal government determines the inflation target for the central bank. For the current fiscal year, the central bank fell short of the 21% inflation target. Nevertheless, there was ambiguity concerning the NEC meeting’s schedule, as the government has not yet constituted the body mandated to ratify Pakistan’s economic growth and national development plans.

The targeted economic growth of 3.6% and the overreaching 12% inflation forecast suggest another year of stagflation for Pakistan, characterized by low growth, elevated poverty, and high unemployment. For this fiscal year, the government had projected a GDP growth target of 3.5%, but provisional results indicated growth languishing at merely 2.4%, primarily driven by the agriculture sector.

Scheduled external debt repayments will exert pressure on foreign exchange reserves and the exchange rate. However, positive prospects for remittances, exports, and external inflows are expected to alleviate these pressures. During the July-April period of this fiscal year, the exchange rate depreciated by an average of 13.6%, from Rs245.4 last year to Rs284.1.

Experts forecast that average inflation in the upcoming fiscal year could hover between 19% and 20%, influenced by taxation measures and exchange rate depreciation as projected by the International Monetary Fund. Achieving the 3.6% GDP growth target hinges on numerous internal and external factors. “The economic outlook for 2024-25 relies on maintaining investor confidence, political stability, macroeconomic stabilization under the new IMF program, significant progress in economic reforms, improved availability of inputs, supportive monetary and fiscal policies, enhanced external inflows, and favorable weather for the agriculture sector,” the plan states.

The government aims for a 2% growth target in the agriculture sector, contingent on favorable weather and access to water, certified seeds, fertilizers, pesticides, and affordable agricultural credit. The industrial sector is projected to grow by 4.4%, driven by a 3.5% increase in large-scale manufacturing. The Planning Commission anticipates that the industrial sector will benefit from improved inputs and energy supplies, a decline in global oil and commodity prices, eased import restrictions, increased public sector expenditure, exchange rate stability, and lower interest rates.

Consequently, the prices of construction materials are expected to fall, supporting a 5.5% growth target for the construction industry in 2024-25. Additionally, the services sector is projected to grow by 4.1%, supported by growth in commodity-producing sectors, which will enhance wholesale and retail trade, as well as transport, storage, and communication sectors.

The government has set the total investment-to-GDP ratio target for the next fiscal year at 14.2%, based on expected economic improvement and political stability. This year, the investment-to-GDP ratio fell to a historic low of 13.1%. National savings are targeted at 13.3% of GDP for 2024-25, slightly up from this year’s level of 13%.

The Planning Commission expects the fiscal deficit to narrow due to fiscal consolidation measures focused on increasing tax revenue and reducing non-development expenditures, including subsidies. The monetary policy will align with the goals of managing inflation expectations and stimulating growth.

The current account deficit is projected to widen to 0.9% of GDP in 2024-25, as import restrictions are further eased to achieve growth targets, particularly in reviving the industrial sector. According to the Planning Commission’s assessment for the APCC, political instability was a significant factor behind this year’s sluggish economic growth and high inflation. “Average inflation soared mainly due to significant currency depreciation amid political instability and dwindling foreign exchange reserves,” stated the Planning Ministry. This depreciation led to higher fuel and input prices.

The limited import demand, high energy and borrowing costs, and weak domestic demand stifled growth in the industrial and services sectors, which each grew by only 1.2%. The APCC noted that contractionary fiscal policy further hindered growth recovery, with both domestic and foreign investment remaining stagnant.

Stock market optimism was partly driven by anticipated macroeconomic stabilization under the new IMF Extended Fund Facility (EFF) program and potential investment inflows from the Middle East through the SIFC. Inflationary pressures remained high throughout 2023-24, primarily due to increased domestic energy prices. To combat high inflation, the policy rate was maintained at a historic high of 22% throughout the year. This high policy rate significantly impacted fiscal policy, as the government needed to generate more revenue to finance a high fiscal deficit largely due to increased domestic debt servicing.

To alleviate inflationary pressures, the State Bank of Pakistan (SBP) raised the policy rate, resulting in higher borrowing costs for businesses. Other factors contributing to high inflation included the reversal of energy subsidies, the reintroduction of a petroleum levy, and import controls. The current account deficit substantially narrowed to $200 million during the first ten months of this fiscal year, a 94.8% reduction compared to $3.9 billion in the same period last year. Despite restrained domestic and external demand, inflationary pressures persisted at elevated levels, although they have been on a downward trend since January 2024.

In summary, Pakistan’s economic outlook for 2024-25 presents a complex and challenging scenario. With the current account deficit expected to widen and inflationary pressures likely to persist, the road to achieving the government’s growth and inflation targets is steep. Political stability, effective economic reforms, and robust external inflows are critical to steering the country towards sustainable growth. While there are signs of potential improvement in various sectors, the overarching economic stability remains contingent on numerous internal and external factors. The government’s strategic focus on fiscal consolidation, investment stimulation, and inflation control will be pivotal in navigating through this period of economic uncertainty and striving towards a more resilient and prosperous future for Pakistan.