Economic prospects and challenges
The State Bank of Pakistan (SBP) has forecast that for the fiscal year 2023-24, the GDP growth rate is expected to fall within a range of 2 to 3 percent, compared to the initial target of 3.5 percent.
This projection suggests that the country’s economic landscape is showing early signs of improvement. Notably, Pakistan was able to secure a Stand-By Arrangement (SBA) of US$ 3.0 billion from the IMF in the later stages of FY23, which played a significant role in mitigating immediate risks to the external sector.
The report also points out that high-frequency indicators show a potential turnaround in economic activity since July 2023. This is expected to be further facilitated by the withdrawal of guidance on import prioritization and a gradual improvement in the foreign exchange position, which should help ease supply chain challenges and stimulate growth in large-scale manufacturing and exports. Additionally, the anticipated resurgence in cotton and rice production is expected to support agricultural growth in FY24. Based on these factors, the SBP envisions real GDP growth in the 2-3 percent range for FY24.
The projections also include a current account deficit in the range of 0.5 to 1.5 percent of GDP for FY24.
The report acknowledges the challenges Pakistan’s economy faced during FY23. It highlights that long-standing structural weaknesses, combined with the impact of successive domestic and global supply shocks, created a complex economic environment. The macroeconomic situation had already begun to deteriorate since the second half of FY22 due to factors like the Russia-Ukraine conflict, elevated global commodity prices, and unplanned fiscal expansion. FY23 saw further challenges, including floods, delays in the IMF’s Extended Fund Facility (EFF) program, domestic uncertainty, and global financial tightening.
Specifically, devastating monsoon floods had a significant impact on economic activity, leading to inflationary pressures and adding stress to external accounts. The uncertain global economic and financial conditions, persistent but elevated global commodity prices, increased debt servicing, and reduced external inflows affected various sectors of the economy.
As a result of these developments, Pakistan’s macroeconomic performance weakened significantly during FY23. Real GDP growth reached its third-lowest level since FY52, and the average National CPI inflation reached multi-decade highs. While the current account deficit did narrow considerably, limited foreign inflows continued to strain the external account, resulting in a decline in SBP’s foreign exchange reserves. The unsustainable fiscal policy stance, marked by increased interest payments, persistent energy subsidies, and lower-than-targeted tax collection, hindered the expected fiscal consolidation during FY23.
Pakistan’s economic performance in FY23 underscores the importance of addressing long-standing structural challenges that pose substantial risks to the country’s macroeconomic stability. Key among these challenges are the need for more effective and timely tax policy reforms, which would provide essential resources, even for current expenditures.
Similarly, the report highlights inefficiencies in public sector enterprises (PSEs) as a drain on fiscal resources, limiting the potential for development spending necessary to enhance the economy’s productive capacity. Inadequate investments in physical and human capital, as well as research and development (R&D), have hindered the development of a technology-intensive manufacturing base and higher-value exports.
Additionally, stagnant crop yields and inadequate attention to developing the food supply chain and addressing food market inefficiencies have led to sustained reliance on imported food commodities. These trends contribute to an unsustainable current account balance, increasing Pakistan’s vulnerability to global supply shocks.
The withdrawal of guidance on import prioritization, along with a gradual improvement in the foreign exchange position, is expected to ameliorate the supply chain situation and boost growth in large-scale manufacturing (LSM) and exports. Furthermore, an anticipated rebound in cotton and rice production will support agricultural growth in FY24. Considering these factors, the SBP anticipates real GDP growth in the range of 2 to 3 percent for FY24.
The delayed effects of monetary tightening and other contractionary measures are expected to keep domestic demand in check. Additionally, the prospects for supply improvement, driven by increased production of essential crops and imports, are likely to reduce inflation within the range of 20.0 to 22.0 percent in FY24.
Slightly improved global and domestic growth prospects are expected to boost foreign exchange earnings from exports of goods and services. Although import volumes may increase, lower commodity prices might prevent a significant expansion in the import bill during FY24. Taking these factors into account, the SBP foresees the current account deficit falling in the range of 0.5 to 1.5 percent of GDP in FY24.
Pakistan’s economy faced numerous challenges during FY23 as longstanding structural weaknesses exacerbated the impact of successive domestic and global supply shocks of an unprecedented nature. The country’s macroeconomic situation had already started deteriorating since the second half of FY22 due to the Russia-Ukraine conflict, elevated global commodity prices, and an unplanned fiscal expansion. The situation worsened during FY23 because of floods, delays in completing the 9th review of the IMF’s Extended Fund Facility (EFF) program, ongoing domestic uncertainty, and tightening global financial conditions.
In particular, devastating monsoon floods significantly disrupted economic activity, fueled inflationary pressures, increased stress on external accounts, and widened the fiscal imbalance due to relief spending. Similarly, uncertain global economic and financial conditions, softening but still elevated global commodity prices, higher debt servicing, and reduced external inflows had implications for various sectors of the economy.
These developments substantially weakened Pakistan’s macroeconomic performance during FY23. Real GDP growth reached its third-lowest level since FY52, and the average National CPI inflation spiked to a multi-decade high. While the current account deficit narrowed significantly, limited foreign inflows continued to exert pressure on the external account, leading to a decline in SBP’s foreign exchange reserves. Moreover, reflecting the unsustainable fiscal policy stance of recent years, a sharp increase in interest payments, persistent large energy subsidies, and lower-than-targeted tax collection contributed to less than expected fiscal consolidation during FY23.
The report underscores that Pakistan’s economic performance in FY23 highlights the need to address persistent structural obstacles that pose significant risks to the country’s macroeconomic stability. Foremost among these are the insufficient and slow progress in tax policy reforms, which have constrained available resources, even for meeting current expenditures.
On the other hand, inefficiencies in public sector enterprises (PSEs) have continued to drain fiscal resources permanently, limiting the room for development spending necessary to enhance the economy’s productive capacity. Inadequate investment in physical and human capital, as well as research and development (R&D), has impeded the development of a technology-intensive manufacturing base and higher-value exports.
Furthermore, stagnant crop yields and the lack of attention to developing the food supply chain and addressing food market imperfections have led to continued reliance on imported food commodities. These trends contribute to an unsustainable current account balance, increasing the country’s vulnerability to global supply shocks.