The State Bank of Pakistan’s report on the state of the economy for the first half of FY23 released last week makes depressing reading. The report projects a broad-based decline in economic activity in the wake of poor performance of both agriculture sector and industrial output, with its negative spillovers for the services sector.

According to the report, the GDP growth is expected to remain below 2pc which is in contradiction of the government’s own forecast of 0.8pc, and 0.4 to 0.6pc projected by the IMF, World Bank and Asian Development Bank for the current fiscal year. Only time will tell which projection is correct.

There are many factors behind the dismal economic outlook. These include the the government’s contractionary monetary and fiscal measures, adverse global economic conditions, uncertainty surrounding the completion of the IMF programme’s 9th review, insufficient external financing and low levels of foreign exchange reserves. Encompassing all this is the continuing political instability and uncertainty about the shape of things in the coming days.

According to available figures, both agriculture production and Large-Scale Manufac­turing (LSM) contracted whereas headline inflation rose to the highest level in decades. The report has pointed out that despite visible contraction in domestic demand, inflation remained stubbornly persistent since H2-FY22. High global commodity prices along with elevated inflation expectations and a range of domestic factors pushed the national consumer price index (NCPI) inflation to 25% during H1-FY23 compared to 9.8% in the same period last year.

Higher food prices, on account of flood induced supply shortages, drove overall inflation followed by non-food and non-energy (NFNE) and energy groups. In addition, rupee depreciation along with the increase in power tariffs and energy prices provided further impetus to inflationary pressures. The second round effect of these supply shocks to broader prices and wages along with rising inflation expectations pushed up core inflation.

The contraction in federal development expenditures to contain further deterioration in fiscal position has had a negative impact on the FY23 economic outlook. The situation has been exacerbated by monetary tightening and other demand-curtailing mea­s­ures which are likely to decelerate the current growth momentum of tax collection and widen the fiscal deficit.

Lower tax collection on account of import restrictions and subdued economic activity, alongside sharp growth in current expenditures driven by higher interest payments on public debt during 1HFY23, have caused a narrowing of the fiscal space.

It needs to be noted here that the SBP has increased its policy rate by 625 basis points during 9MFY23, taking the total rate hike to 1,300bps during the current cycle of monetary tightening. This has raised the cost of production all across the board and fueled inflation. To quote the State Bank, “The central bank raised the policy rate by 225 bps in H1-FY23 on top of the 675bps increase during FY22 to address the challenges. Similarly, the government resorted to curtail federal expenditures on grants, subsidies and development. Furthermore, to contain pressures on external accounts the government and the SBP introduced various regulatory measures to restrict imports.”

Given the prevailing domestic macroeconomic uncertainty, the impact of flood, and the increasing interest rate environment globally, the external account vulnerabilities remained at their peak. The external account pressures are mounting in the midst of scheduled debt repayments and slowing foreign inflows, resulting in a severe depletion foreign exchange reserves. As per the report, the external sector, in general, and external financing, in particular, remained under significant pressure during H1-FY23 due to uncertainty regarding the resumption of the IMF programme, along with tight global financial conditions. Supply chain disruptions, resulting from the Russia-Ukraine conflict and China’s zero-Covid policy, hampered global demand and adversely impacted Pakistan’s export performance.

On the supply side, flood-related disruptions led to lower crop outturns, which not only dented the food exports but also deteriorated the commodity import outlook. On the other hand, rising disinvestments and delays in the disbursements of the IMF tranches and higher net forex outflows have added to external account pressure. These factors, combined with the US dollar’s appreciation against a basket of global currencies, have led to rupee depreciation during 1HFY23. Another piece of bad news is the dip in the workers’ remittances, a development which has further worsened the external accounts balance.

The State Bank report has made a realistic and rational analysis of the ills affecting the national economy but unfortunately it has not suggested any feasible and concrete measures and the way forward to rescue the economy from its present predicament.