pakistan gdp growth projected to drop to 2-3% in FY24, says sbp
Published on: December 30, 2023.
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ISLAMABAD – The State Bank of Pakistan (SBP) has projected that the country’s real GDP growth will fall between 2-3 percent in the fiscal year 2024 due to some early signs of improvement in the economic situation.
In an effort to alleviate immediate risks, Pakistan secured a $3.0 billion Stand-By Arrangement (SBA) from the International Monetary Fund (IMF) towards the end of the previous fiscal year. The initial disbursement of $1.2 billion under the SBA in July 2023, along with $3 billion in bilateral inflows, helped reverse the declining trend in the SBP’s FX reserves. Additionally, the July 2023 World Economic Outlook showed improved prospects for global economic growth in 2023 compared to previous projections. Furthermore, non-energy global commodity prices have also eased compared to the previous year, which could have positive implications for Pakistan’s economy.
According to the SBP, high frequency indicators suggest that economic activity has reached its lowest point since July 2023. The withdrawal of import prioritization guidance at the end of June 2023, coupled with a gradual improvement in the foreign exchange position, is expected to improve the supply chain situation and boost growth in large-scale manufacturing and exports.
Furthermore, an expected rebound in cotton and rice production will support agricultural growth in the fiscal year 2024. To promote cotton production, the government announced a minimum price of Rs 8,500 per 40 kg for the current crop. This incentive has already led to an increase in cotton sowing area and is likely to encourage farmers to expand their crop management practices despite rising fertilizer and pesticide prices. As a result of these incentives, cotton arrivals have increased by 97.5 percent compared to the same period last year. Similarly, favorable weather conditions and higher domestic rice prices have incentivized growers to expand the area under rice cultivation and increase production.
The expansion in commodity-producing sectors is expected to have a positive effect on services in the fiscal year 2024. However, the impact of previous demand compression measures may limit the pace of economic recovery. Taking these factors into account, the SBP expects real GDP growth to fall between 2-3 percent in the fiscal year 2024.
The lagged impact of monetary tightening and other contractionary measures is expected to keep domestic demand in check. Moreover, the expected increase in production of important crops and resumption of imports are likely to further moderate inflationary pressures in the fiscal year 2024. Along with improved domestic supplies, a high base from last year and sluggish non-energy global commodity prices are expected to bring inflation down to 20.0-22.0 percent. However, unforeseen climate events, adverse movements in global commodity prices (especially oil), and external account pressures pose important upside risks to this outlook.
The SBP projects a fiscal deficit of 7.0-8.0 percent in the fiscal year 2024. Higher interest payments may prevent significant spending reductions during this period. However, non-interest expenditure is expected to remain contained due to lower subsidies and grants. A slow recovery in economic activity is likely to increase revenue collection. The government has planned to increase tax rates on top income brackets, builders, developers, property, and introduce additional GST on unregistered businesses to boost revenues.
The outlook for the external account has improved at the start of the fiscal year 2024. The finalization of the Stand-By Arrangement with the IMF has revived confidence among multilateral and bilateral creditors as well as international investors, leading to significant foreign inflows in the first two months of the fiscal year. Additionally, slightly improved global and domestic growth prospects are expected to boost foreign exchange earnings from goods and services exports. Although import volumes are expected to increase, lower commodity prices may prevent a significant expansion in the import bill. However, workers’ remittances in the fiscal year 2024 are expected to be slightly lower compared to the previous year. Taking all these factors into account, the SBP projects the current account deficit to fall between 0.5-1.5 percent of GDP in the fiscal year 2024.
Source: [The Nation](https://www.nation.com.pk)
