The International Monetary Fund (IMF) has recently released its World Economic Outlook report, keeping Pakistan’s economic growth forecast steady at 2% for the current fiscal year. However, amidst ongoing challenges, including escalating inflation and utility price hikes, the international lender has revised its inflation projection upward to nearly 25%. This adjustment underscores the persistent economic strains facing Pakistan.

The report indicates a nuanced economic landscape for Pakistan. Despite efforts to stabilize the economy, the country faces hurdles such as import restrictions, tight monetary policies, and escalating business costs, contributing to subdued growth. Data from the Pakistan Bureau of Statistics reveal concerning contractions in the large-scale manufacturing sector, further dampening economic prospects. Moreover, the IMF warns of potential inflation persistence, despite recent modest declines attributed to lower food and energy prices.

The IMF’s projections extend into the next fiscal year, foreseeing a modest growth uptick to 3.5%, albeit with inflation hovering around 12.7%, a slight increase from previous estimates. These forecasts indicate the delicate balance Pakistan must strike to stimulate growth while managing inflationary pressures.

The IMF has maintained Pakistan’s economic growth forecast at 2%, while adjusting the inflation projection to nearly 25% for the current fiscal year. This revision comes as the country faces another round of increases in utility and fuel prices. In its report, the IMF also lowered the current account deficit forecast to 1.1% of gross domestic product (GDP) or below $4 billion, although this projection remains approximately $1.5 billion higher than Pakistan’s estimates. Additionally, the IMF has raised the inflation forecast for the next fiscal year 2024-25 but left the economic growth projection unchanged.

The report indicates that Pakistan’s economy is expected to grow by 2% during the current fiscal year, a forecast consistent with the IMF’s initial review report under the $3 billion standby arrangement. This outlook aligns with projections from the World Bank and the Asian Development Bank, which also anticipate growth slightly below 2%. During the second quarter of this fiscal year, Pakistan’s economy expanded by only 1%, attributed to ongoing import restrictions, tight monetary policies, and rising business costs, which are impacting affordability for the majority of the population.

According to the Pakistan Bureau of Statistics, the large-scale manufacturing sector contracted by 0.51% during the July-February period compared to the same period last year. This indicates that the economic growth rate in the third quarter may also be subdued, unless there is significant improvement in the agriculture sector’s output.

The IMF report suggests that inflation for the current fiscal year could persist at 24.8%, a modest 1% increase from its forecast four months ago. This adjustment follows the Pakistan Bureau of Statistics (PBS) reporting a slowdown in the inflation rate to 20.7% in March. Pakistan experienced a noteworthy decline in short-term inflation, hitting a 31-week low of 28.54% for the week ending April 18, 2024, compared to the same period last year. This decrease was mainly attributed to lower prices of essential food and energy items. However, despite this improvement, inflation remained high, lingering around 30%.

Data from the PBS and local research firms indicate that weekly inflation dropped to a seven-month low of 28.54% after peaking at 44.6% in January 2024. State Bank of Pakistan (SBP) Governor Jameel Ahmad, in discussions with investors in Washington, echoed this trend, highlighting that Pakistan’s inflation slowdown was broad-based, reflecting the combined impact of monetary tightening and fiscal consolidation.

Earlier projections from the central bank had expected inflation to range from 20% to 22% in July 2023. However, after a significant increase in gas prices by the government in November 2023, the SBP revised its forecast, anticipating inflation to fall between 23% and 25% for the current fiscal year.

Despite significant room for reduction, the central bank did not decrease the interest rate in its last meeting. Furthermore, another round of increases in gas and electricity prices is imminent, likely further fueling inflation. Additionally, the prime minister has approved implementing gas prices based on the average of local and imported gas, resulting in an approximately 41% price increase.

The IMF report also indicated that Pakistan’s economy may see growth of 3.5% during the next fiscal year. Additionally, it projected that inflation could hover around 12.7%, which is 1% higher than its previous forecast.

According to the World Economic Outlook report, global growth is anticipated to reach 3.2% in 2023, maintaining the same pace in 2024 and 2025. The projection for 2024 has been revised up by 0.1 percentage point from the January 2024 report and by 0.3 percentage points compared to the October 2023 WEO forecast. Furthermore, the IMF has reduced Pakistan’s current account deficit projection from 1.5% of GDP to 1.1% for this fiscal year. While this brings the deficit below $4 billion, it still exceeds the Ministry of Finance’s estimates of a $2.5 billion deficit. For the next fiscal year, the IMF projects the current account deficit to stand at 1.2% of GDP. These projections for the next fiscal year’s current account deficit are crucial in evaluating the country’s total external financing needs, including requirements for loan repayments.

As Pakistan faces economic challenges, including inflationary spikes and tepid growth, the IMF’s insights provide critical guidance. With inflation projected to remain elevated and growth prospects modest, policymakers face the imperative of implementing prudent fiscal and monetary measures to stabilize the economy and foster sustainable development. Additionally, close monitoring of key indicators such as the current account deficit is essential to safeguarding the country’s external financial position and meeting future financing needs.