The economic landscape in Pakistan during the first half of fiscal year 2023 was marked by various challenges and uncertainties. The State Bank of Pakistan (SBP) recently released a report shedding light on the state of the economy, highlighting key issues such as the contraction in agriculture production and industrial output, elevated inflation levels, external account vulnerabilities, and fiscal constraints.

This period was further complicated by the aftermath of flash floods and political instability. Let us delve into the findings of the SBP report and explore the implications of these economic challenges. During the first half of fiscal year 2023, there were significant concerns due to adverse global economic conditions, uncertainty regarding the completion of the International Monetary Fund (IMF) program’s 9th review, insufficient external financing, and a low level of foreign exchange reserves. These concerns were further intensified by the consequences of flash floods and political instability.

The State Bank of Pakistan (SBP) predicts a widespread decrease in economic activity due to weakened performance in both the agriculture sector and industrial output, which will have negative effects on the services sector. In its report on the economic status for the first half of FY23, the central bank observed that measures taken to manage demand and the impact of the 2022 floods heavily influenced the growth prospects for FY23. The report also mentioned that GDP growth is expected to remain below 2 percent.

However, on April 27, the government revised the GDP growth forecast to 0.8 percent, slightly higher than the 0.4 to 0.6 percent projected by the IMF, World Bank, and Asian Development Bank for the current fiscal year. The report emphasized that adverse global economic conditions, uncertainty surrounding the completion of the IMF programme’s 9th review, insufficient external financing, and low foreign exchange reserves are significant concerns during the first half of FY23. These concerns were exacerbated by the consequences of flash floods and political instability.

Both agriculture production and Large-Scale Manufacturing (LSM) experienced a decline, while headline inflation reached its highest level in decades. The reduction in federal development expenditures, implemented to address fiscal challenges, has presented obstacles to the economic outlook for FY23. The expectation of a further slowdown in economic activity, coupled with monetary tightening and other measures to curtail demand, is likely to hinder the current growth momentum of tax collection, leading to an increase in the fiscal deficit. In view of the constrained fiscal space, the deficit is expected to expand throughout FY23.

The narrowing of the fiscal space has been caused by a deceleration in tax collection due to temporary import restrictions and subdued economic activity. Additionally, increased current expenditures driven by higher interest payments on public debt during the first half of FY23 have contributed to this situation. To achieve fiscal consolidation, the government has implemented measures to rationalize expenditures by reducing subsidies and grants. Furthermore, additional revenue mobilization measures were introduced in February, as stated in the report.

The prevailing uncertainty in the domestic macroeconomic environment, the impact of floods, and the global rise in interest rates are expected to keep external account vulnerabilities elevated in FY23. Despite a $5.5 billion decrease in the current account deficit (CAD) during the first half of FY23, external account pressures persisted due to scheduled debt repayments and significantly lower foreign inflows. As a result, there was a substantial decline in foreign exchange reserves.

Alongside delays in the disbursement of IMF tranches and political uncertainty, higher net outflows of foreign exchange due to scheduled debt repayments and disinvestments added to the pressures on the external account. These developments, combined with the appreciation of the US dollar against a basket of global currencies, resulted in the depreciation of the Pakistani rupee during the first half of FY23.

A decline in workers’ remittances was also observed during the period, attributing it to both global economic slowdown and an increase in the use of informal channels, which affected the inflows. Headline inflation is projected to remain high, ranging from 27 to 29 percent in FY23. The deteriorating inflation outlook is primarily attributed to persistent increases in food and energy prices, while core inflation is expected to continue its upward trend.

The first half of the current fiscal year has presented significant economic challenges for Pakistan. The contraction in agriculture production and industrial output, coupled with elevated inflation levels, has dampened economic activity. External account vulnerabilities, driven by scheduled debt repayments and lower foreign inflows, have put pressure on foreign exchange reserves. The delays in IMF tranches and political uncertainty have further exacerbated the situation. Furthermore, the decline in workers’ remittances has added to the economic strain.

Moving forward, addressing these issues will require concerted efforts from both government and monetary authorities to stabilize the economy, attract foreign investments, and foster sustainable growth in the face of ongoing uncertainties.