ISLAMABAD    -   The Asian Development Bank (ADB) on Tuesday noted that Pakistan’s economic growth is expected to slow significantly in the current fis­cal year in the wake of last year’s devastating floods, ballooning infla­tion, a current account deficit, and an ongoing foreign exchange crisis.

“Growth is projected to deceler­ate to 0.6 percent in FY2023,” said Asian Development Outlook (ADO) April 2023, ADB’s flagship econom­ic report. The growth in last fiscal year was 6 percent. Growth is fore­cast to rise to 2 percent in the next fiscal year (FY2024), assuming the resumption of macroeconomic sta­bility, implementation of reforms, post-flood recovery, and improving external conditions. A return to po­litical stability with the formation of a new government after sched­uled general elections would im­prove business sentiment. Weighing on economic activity are the diffi­cult political situation, economic losses and devastation from flood­ing, the ongoing foreign exchange crisis, tighter macroeconomic poli­cies, and the challenging external en­vironment. High inflation will affect purchasing power and thus restrain domestic demand. Increased govern­ment spending to support relief, re­covery, and rehabilitation in the af­termath of the floods is expected to compensate for some of the damage and disruption to economic activity during the first half of the fiscal year.

The ADB has warned that aver­age inflation is projected to more than double from 12.2 percent in FY2022 to 27.5 percent. It stated that headline consumer inflation jumped to 25.4 percent in the first 7 months of the fiscal year on high­er domestic energy prices, a weak­er currency, flood-related supply disruption, and restraint on im­ports caused by a serious crisis in the balance of payments. Head­line inflation is expected to de­crease to 15.0 percent in FY2024 as global energy prices decline and flood-induced supply con­straints are resolved, as well as from a high base effect. The cen­tral bank tightened monetary pol­icy further in response to rising in­flation and external imbalances, raising the policy rate by another 200 basis points in the first half of FY2023 to 17.0percent in January 2023, which was still below the in­flation rate. On 2 March 2023, the central bank increased its policy rate by a further 300 basis points to 20.0percent to tackle inflation.

The ADB has noted that fiscal defi­cit is projected to narrow slightly to the equivalent of 6.9percent of GDP in FY2023. If the IMF programme re­mains on track, it will likely contin­ue to shrink over the medium term as revenue mobilization measures gain momentum, including general sales tax harmonization and person­al income tax reform. The fiscal defi­cit stood at 2.0percent of GDP during July–December 2022, remaining sta­ble from the same period of 2021, while the primary surplus rose from 0.1percent of GDP to 1.1percent as domestic tax collection declined.