The chief of Pakistan’s central bank has forecast a decline in inflation to approximately 20-22% for the fiscal year 2024. This projection, disclosed in the Governor’s Annual Report 2022-23 ahead of a crucial national election, is anticipated to play a pivotal role in restoring both political and economic stability in the country.

The report acknowledges the ongoing efforts of the State Bank of Pakistan (SBP) to curb entrenched inflation and sheds light on the significant shortfall in Pakistan’s fiscal and primary surplus targets for FY23, resulting in a contraction of real GDP to 0.2%.

Despite encountering its highest-ever inflation during FY23, a $3 billion International Monetary Fund (IMF) bailout in July averted a sovereign default as the Consumer Price Index (CPI) surged to 29.2%, nearing the upper limit of the bank’s revised projections.

In his report, SBP Governor Jameel Ahmed outlines initiatives to anchor inflation expectations and achieve a medium-term target of 5-7% by the end of FY25. Fiscal and policy measures, both pre and post-bailout, are stabilizing Pakistan’s $350 billion economy as the nation approaches a critical national election on February 8.

As we look ahead, the finance ministry foresees a moderate inflation outlook for the remaining months of FY24, supported by high-frequency indicators signaling economic recovery. The SBP’s projection of a 2-3% fall in real GDP growth for FY24 indicates early signs of improvement. The $3.0 billion Stand-By Arrangement from the IMF, positive global economic trends, and easing non-energy commodity prices are expected to bolster Pakistan’s economic outlook.

A bottoming out of economic activity from July 2023, coupled with strategic decisions such as the withdrawal of import prioritization guidance and an improving FX position, is set to mitigate supply chain challenges and stimulate growth in large-scale manufacturing and exports.

Moreover, an expected rebound in cotton and rice production, driven by government initiatives and favorable conditions, adds a promising dimension to agriculture growth in FY24. With increased cotton sowing and a substantial rise in cotton arrivals, alongside expanded rice cultivation, Pakistan’s economic landscape appears poised for positive transformations in the ongoing year.

The timing of the report aligns with expectations that the forthcoming election will play a pivotal role in fostering both political and economic stability in the country. This report not only underscores the State Bank of Pakistan’s (SBP) commitment to proactively address inflation but also sheds light on the economic challenges faced in the preceding fiscal year. The stark realization that fiscal and primary surplus targets for FY23 were significantly missed, resulting in a contraction of real GDP to 0.2%, sets the backdrop for the comprehensive measures required to recalibrate the economic landscape.

The finance ministry predicts a moderate inflation outlook for the remaining months of FY24, despite upward revisions in administered prices such as gas prices. CPI-based inflation for December is projected to be between 27.5% and 28.5%, with an anticipated easing to 24-25% in January 2024.

The SBP projects Pakistan’s real GDP growth to fall in the range of 2-3% in FY24, signaling early signs of improvement in the economic situation. The country secured a $3.0 billion Stand-By Arrangement (SBA) from the IMF towards the end of FY23, alleviating immediate risks. Positive trends in global economic growth and easing non-energy global commodity prices are expected to have favorable implications for Pakistan’s economy.

High-frequency indicators suggest a bottoming out of economic activity from July 2023, with the withdrawal of guidance on import prioritization and an easing FX position expected to ameliorate supply chain issues and boost growth in large-scale manufacturing (LSM) and exports.

Additionally, an anticipated rebound in cotton and rice production is set to support agriculture growth in FY24. The government’s announcement of a minimum price for cotton in the FY24 crop has encouraged increased sowing, reflecting a strong 97.5% increase in cotton arrivals compared to the same period last year. Favorable weather conditions and rising domestic rice prices have incentivized growers to expand the area under rice crop, contributing to increased production in the ongoing year.

The anticipated growth in commodity-producing sectors is expected to have a ripple effect on services in FY24. However, the impact of various measures to compress demand introduced in the past two years may impede the pace of recovery in economic activity. Considering these factors, the State Bank of Pakistan (SBP) foresees real GDP growth falling within the range of 2-3 percent in FY24.

The delayed effects of monetary tightening and other contractionary measures are expected to restrain domestic demand. Additionally, the prospect of an improved supply situation, driven by a likely increase in the production of vital crops and the resumption of imports, is anticipated to alleviate inflationary pressures in FY24. Alongside enhanced domestic supplies, a high base from the previous year and a sluggish trend in non-energy global commodity prices are anticipated to contribute to lowering inflation within the range of 20.0-22.0 percent in FY24. However, unforeseen climate events, adverse movements in global commodity prices, especially oil, and external account pressures pose important upside risks to this outlook.

The SBP projects a fiscal deficit within the range of 7.0-8.0 percent in FY24. Higher interest payments may persist, hindering a significant reduction in spending during FY24. Nonetheless, non-interest expenditure is expected to remain controlled due to lower subsidies and grants. A modest recovery in economic activity is likely to boost revenue collection during FY24. The government plans to increase revenues by raising the Petroleum Development Levy (PDL) to Rs 60/litre, implementing higher rates on top income tax brackets, builders, developers, and property, and introducing additional GST on unregistered businesses.

The outlook for the external account improved at the beginning of FY24. The finalization of a Stand-By Arrangement with the IMF played a crucial role in restoring the confidence of multilateral and bilateral creditors, as well as international investors, resulting in substantial foreign inflows during the first two months of FY24. Meanwhile, slightly improved global and domestic growth prospects are expected to support foreign exchange earnings from exports of goods and services. Although import volumes may rise, lower commodity prices are likely to prevent a significant expansion in the import bill during FY24. Workers’ remittances in FY24, however, are projected to be slightly lower compared to the previous year. Taking these factors into account, the SBP anticipates the current account deficit to fall within the range of 0.5-1.5 percent of GDP in FY24.

In conclusion, Pakistan stands at the crossroads of economic rejuvenation and stabilization. The IMF bailout in FY23 served as a crucial intervention, preventing a sovereign default amid the nation’s highest-ever inflation at 29.2%. SBP Governor Jameel Ahmed’s commitment to anchoring inflation expectations and steering towards a medium-term target of 5-7% by FY25 signals a concerted effort.

As the nation approaches a critical national election, fiscal and policy measures are playing a pivotal role in stabilizing the $350 billion economy. The finance ministry’s projection of moderate inflation for the remaining months of FY24 and the SBP’s outlook of 2-3% real GDP growth in FY24 are indicative of early signs of economic improvement.

Moreover, the positive trends in global economic growth, along with the anticipated rebound in cotton and rice production, provide a ray of optimism. The strategic withdrawal of import prioritization guidance, coupled with an improving FX position, is expected to mitigate supply chain challenges and foster growth in key sectors. The government’s initiatives, such as setting a minimum price for cotton in the FY24 crop, have already shown promising results, with a substantial increase in cotton arrivals.

While challenges persist, Pakistan’s economic narrative for FY2024 is one marked by resilience, adaptive strategies, and a proactive stance towards growth and stability.