The ‘State of Pakistan’s Economy’ report for the first half FY24 released by the State Bank of Pakistan (SBP) shows that the country’s macroeconomic conditions slightly improved during the period under review.

According to the report, real economic activities moderately recovered as compared to the last year when the economy shrank quite a bit. At the same time, the Stand-By Arrangement (SBA) with the IMF helped relieve the pressure on the external account.

Another positive development was a narrowing of the current account deficit, thanks to continued contractionary monetary and fiscal policies, higher agricultural production and a dip in global commodity prices. On the fiscal front, the primary balance showed surplus during the first six months of FY24 compared to the corresponding period of FY23 on account of an increase in both tax and non-tax revenues.

Giving details, the State Bank report says the real GDP grew by 1.7 percent in H1-FY24 mainly due to a buoyant agriculture sector, a factor that also boosted some of the agro-based industries. Removal of import restrictions helped improve the availability of raw materials for the industry. On the other hand, the approval of the IMF’s SBA eased external borrowing constraints, leading to an increase in financial inflows during H1-FY24. In addition, lower levels of scheduled external loan repayments as compared to H1-FY23 and significant reduction in current account deficit on account of a decline in imports as well as upsurge in exports substantially increased the SBP’s forex reserves.

On the negative side, inflation remained a headache, creating severe hardship for the common man. Inflation continued to bite despite subdued domestic demand and a decline in global commodity prices. According to the SBP, a toxic combination of unresolved structural issues, creeping rupee depreciation as compared to H1-FY23, an increase in government spending and supply side shocks kept inflation at elevated levels. There were a number of factors involved in the situation, including higher input costs, an increase in indirect taxes, and implementation of upward revision in minimum wage announced in the FY24 budget, alongside the second-round effects of administered prices of food and energy items.

The SBP report minces no words in saying that despite some improvement in macroeconomic indicators, the national economy continues to be hobbled by long standing structural issues. The structural bottlenecks are many, ranging from low savings and investments to underdeveloped physical and human capital, weak productivity, stagnant exports, a narrow tax base and loss-making state enterprises. The State Bank report has also highlighted the role of political uncertainties in worsening the economic crisis facing the country. Political turmoil results in hiccups and inconsistency in economic policies, weak governance and public administration, hindering investment and economic development.

While diagnosing the ills afflicting our economy, the SBP report also suggests measures to remedy the situation, including the need for long overdue policy reforms to ensure sustainable development over the medium to long-term. There is a special section in the report about the long-term trends in inflation and its determinants in Pakistan. It also sheds light on policy and structural factors influencing inflation, including monetary policy framework, fiscal and debt policy, trade openness, agricultural efficiency, productivity and demographic trends. The SBP report recommends that reducing political and policy uncertainties and more fiscal consolidation can help bring inflation down at a faster pace in the short run. It also emphasizes on addressing long standing structural issues to achieve low and stable inflation over the medium term, without overburdening monetary policy and the consequent high economic costs.

The report optimistically projects the continuation of modest economic recovery in the second half of FY24. Given expected improvements in business confidence, high frequency demand indicators since November 2023, and prospects for a good wheat production during FY24, the SBP projects real GDP growth in the range of 2-3 per cent for FY24. The NCPI inflation, on the other hand, is expected to remain on a downward trajectory despite uncertainties persisting in both the domestic economy and international commodity market. It seems a long shot but the SBP projects the average NCPI inflation in the range of 23.0 – 25.0 per cent for FY24, lower than 29.2 per cent in FY23, and is expected to come down to 5 – 7 per cent range by September 2025. This sounds too good to be true.

On an external account, the current account deficit is projected to remain lower than earlier estimates, amid slightly improved global outlook and domestic growth prospects to boost foreign exchange earnings from exports and remittances. The current account deficit is also expected to be in the range of 0.5 – 1.5 per cent of GDP for FY24. However, this optimistic macroeconomic outlook remains vulnerable to geopolitical tensions, unfavorable weather conditions, adverse movements in global oil prices, and subsequent external account pressures. Further rise in energy prices and fiscal consolidation are factors that may adversely affect the inflation trend.