The IMF projections in the new Stand-By Facility for Pakistan are more conservative, and see greater persistence of stagflation. The GDP growth rate is projected at 2.5% and the rate of inflation at close to 26%.
Dr. Hafiz A. Pasha
The year 2022-23 witnessed the worst from of ‘stagflation’ in the history of Pakistan. Primarily due to the ravages of the floods and severe physical restrictions on imports of raw materials and inputs, the GDP growth rate is likely to have been significantly negative. Simultaneously, due to large supply shortages and the 40% devaluation of the rupee, the rate of inflation rose to a monthly average of 29.2%.
The unemployment rate has risen to 8.5%, with almost two million workers losing their jobs during the year. Real wages have dropped by 15% to 20%. The incidence of poverty has risen from 33% to 42% of the population. Over 20 million more people have fallen below the poverty line, due especially to the unprecedented increase in food prices of almost 40% in 2022-23.
Foreign exchange reserves had fallen to the abysmally low level of $4 billion by end-June 2023 despite the reduction the current account deficit by almost $15 billion. This was due primarily to a large decline in the inflows of foreign investment and external assistance by 45% and a big jump of 29% in external debt repayments.
What does the year, 2023-24 promise for the people of Pakistan? There are two sets of macroeconomic projections for the year. The Ministry of Finance projects the GDP growth rate at 3.5% and the rate of inflation at close to 22%. The IMF projections in the new Stand-By Facility are more conservative, and see greater persistence of stagflation. The GDP growth rate is projected at 2.5% and the rate of inflation at close to 26%.
There is need to assess the prospects for Pakistan in 2023-24, in relation to the two sets of macroeconomic projections. The year has started well with finalization of the Stand-By Facility by the IMF and external inflows of over $4 billion. Reserves have risen to $8.2 billion. The stock market has jumped up by almost 10% and the rupee’s value has stabilized.
However, there are number of factors which will determine the extent of risk and uncertainty both on the political and economic fronts. Will the transition to a caretaker government be followed by a process of elections conducted in a timely, fair and peaceful manner?
Will the tough performance criteria in the Stand-by Facility be successfully adhered to in September 2023 and December 2023 and thereby sustain the IMF Program or will major prior actions have to be taken by whichever government is in place at that time? The recent legal amendments have enhanced the powers of a caretaker government to take the appropriate steps to meet the Program targets.
One of the key policy changes in the Stand-by Facility is the withdrawal of all physical restrictions on imports and a full transition to a market-based exchange rate policy. Simultaneously the expectation by the IMF is that interest rates will be kept at a very high level. Further, that the consolidated budgets of the federal and the provincial governments will generate a significant primary surplus, despite the over 30% hike in pay and pensions in 2023-24.
The critical risk factor is whether this policy framework will be successful in keeping the annual current account deficit at $6.5 billion only and sustain foreign exchange reserves at close to $9 billion throughout the year.
The expectation is that imports will increase by almost $12 billion, with financing by a $4 billion rise in exports, $6 billion higher home remittances and the additional inflow of external assistance of $7 billion.
However, exports are likely to be handicapped by the big increase in energy tariffs and the high financing costs. Disbursements of loans by international commercial banks and flotation of Euro/Sukuk bonds will hinge on improvement in Pakistan’s credit-rating. Continuation of the Stand-By Facility will be linked to meeting the tough performance criteria especially related to the budgetary position and to operations by the SBP.
Given these big risk factors, the likelihood is that managing the external balance of payments will require a larger depreciation in the value of the rupee in 2023-24 than the 20% envisaged by the IMF. Meeting the fiscal targets, especially that of increasing FBR revenues by 34%, will require additional taxation measures by the newly elected government, more or less, immediately after its takeover. In particular, the target growth rate of 44% in indirect taxes looks very ambitious, especially with the slump in the large-scale manufacturing sector.
Therefore, the likely scenario for 2023-24 is a rate of inflation close to the rate in 2022-23, with a likely high rate of depreciation of the rupee and big increases in energy and fuel costs. Already, the rate of inflation in July 2023 has been estimated at 28.4% in July as compared to 24%.in July 2023.
The writer is
Professor Emeritus at Beaconhouse National University