The State Bank of Pakistan (SBP) has projected a significant slowdown in economic growth for the ongoing fiscal year in Karachi. The dual impact of devastating floods and fiscal consolidation measures has been cited as the primary cause, according to a report by The News.
In its half-year report for fiscal year 2022-23 (FY23), the central bank stated that real GDP growth is expected to be considerably lower than the previous year’s growth rate of 6% and its own revised projection of approximately 2%. The SBP highlighted that “demand management measures and the 2022 floods have weighed heavily on the growth outlook for FY23.”
These concerns about economic growth align closely with the forecasts made by international financial institutions. The International Monetary Fund (IMF) recently revised down its growth outlook for Pakistan, predicting a mere 0.5% expansion for the year. Similarly, the World Bank projected a 0.4% GDP growth for Pakistan, down from its previous forecast of 2% made in October.
The SBP’s economic assessment comes at a time when Pakistan is grappling with a severe balance of payments crisis, declining foreign exchange reserves, and record-high inflation. The lack of progress in Pakistan’s IMF bailout program has increased the possibility of default, while tensions following the arrest of Imran Khan, Chairman of Pakistan Tehreek-e-Insaf, may further hinder the likelihood of the IMF’s $6.5 billion bailout, exacerbating political and economic unrest in the country.
The SBP also highlighted that consumer price index (CPI) inflation is expected to remain high, ranging from 27-29% in FY2023. It attributed the deteriorating inflation outlook to persistent increases in food and energy prices, with the possibility of core inflation also rising. Factors such as exchange rate depreciations, fiscal adjustments including tax revisions, and inflation expectations contribute to the near-term risks to inflation.
Additionally, the SBP noted that uncertainty surrounding crude oil price increases due to faster-than-expected growth in the Chinese economy and lower-than-target wheat production in Pakistan pose further risks to the inflation outlook.
Despite improvements in the current account deficit, external account pressures persist due to scheduled debt repayments and reduced foreign inflows, resulting in a significant decline in foreign exchange reserves. The SBP expects elevated levels of external account vulnerabilities in FY23, given the prevailing domestic macroeconomic uncertainty, the impact of floods, and the global interest rate environment. However, resuming the IMF loan program would help alleviate concerns by increasing access to multilateral and bilateral financing options.
The SBP’s report acknowledged that adverse global economic conditions, uncertainties regarding the completion of the IMF program’s 9th review, insufficient external financing, and low foreign exchange reserves were major concerns during the first half of FY23. The aftermath of flash floods and political instability further exacerbated these challenges. Agriculture production and large-scale manufacturing (LSM) both contracted, while headline inflation reached multi-decade highs.
The SBP stated its commitment to containing inflation, stabilizing the external sector, and supporting economic growth. However, it cautioned that the economic outlook remains challenging with a high degree of uncertainty.