ISLAMABAD  -  The State Bank of Pakistan (SBP) has noted that Pakistan’s macroeconomic conditions somewhat improved during the first half (July to December) of the current fiscal year, as real economic activities moderately recovered against the contraction in last year.

“Stand-By Arrangement (SBA) with the IMF helped reduce stress on external account. Meanwhile, the current account deficit narrowed considerably, amid continued contractionary monetary and fiscal policies, better agriculture output and ease in global commodity prices. Despite restrained domestic demand, inflationary pressures remained persistent at elevated levels,” the SBP noted in its Economy Report for H1-FY24.

The modest economic recovery in H1-FY24 is expected to continue in the second half of FY24. This is also reflected by improvement in business confidence about expected economic conditions since November 2023. On the other hand, the inflationary pressures, albeit elevated, are expected to moderate. Moreover, the external account outlook has improved. The CAD is expected to be lower than the earlier projection, whereas disbursement of the last tranche of US$ 1.1 billion under the IMF’s SBA would help maintain external buffers. High-frequency indicators suggest a moderate recovery in economic activity from November 2023 onwards. In addition to a rebound in cotton and rice production, the prospects for good wheat harvest during FY24 also increased. This is mainly on the back of higher area under cultivation, better input availability, and favorable weather conditions. The continued easing of FX constraints ameliorated the supply chain situation and availability of industrial raw materials that is supporting some of the large industries. In view of these developments, the SBP projects real GDP growth in the range of 2– 3 percent for FY24. Going forward, further adjustments in energy prices and fiscal consolidation, warranted for slowing the pace of debt accumulation, may continue to weigh on economic activities. In this context, achieving a higher growth trajectory over the medium to long-run depends on reforms addressing lingering structural issues. Continued tight monetary policy stance and fiscal consolidation are expected to keep domestic demand in check.

Moreover, the anticipated increase in wheat production may help maintain downward trajectory in food inflation by improving supply and discouraging any speculative sentiments. On the other hand, any significant increase in administered energy prices may offset the impact of these positive developments on inflation outlook. Incorporating these factors, the SBP has revised its inflation projection range to 23.0 – 25.0 percent for FY24. However, escalating geopolitical tensions, unfavorable weather conditions, adverse movements in global oil prices, and subsequent external account pressures are some important upside risks to this outlook. On an external account, slightly improved global outlook and domestic growth prospects are anticipated to boost foreign exchange earnings from exports and remittances. While resilient global demand may have a positive impact on Pakistan’s exports, moderating global commodity prices may significantly suppress import prices, leading to an overall contraction in import bill and, hence improvement in trade balance. Taking these factors into account, the SBP projects the current account deficit in the range of 0.5 – 1.5 percent of GDP for FY24. This outlook remains susceptible to unfavorable movement in international commodity prices and continued tight global financial conditions. Under these circumstances, it is imperative to boost exports through reforms aimed at enhancing productivity and attracting FDI in export-oriented sectors to keep the CAD at sustainable level without constraining domestic economic activities.

Meanwhile, the current account deficit narrowed considerably, amid continued contractionary monetary and fiscal policies, better agricultural produce and ease in global commodity prices. On the fiscal side, primary balance posted a higher surplus during H1-FY24 compared to H1-FY23 on account of strong growth in both tax and non-tax revenues that outpaced increase in non-interest expenditure. Despite restrained domestic demand, inflationary pressures remained persistent at elevated levels, the Report noted. The real GDP, driven by the agriculture sector, grew by 1.7 percent in H1-FY24. The recovery in the agriculture sector also supported some of the agro-based industries. In addition, withdrawal of import prioritization measures improved availability of raw materials for industry, the report said. The approval of the IMF’s SBA eased external borrowing constraints, leading to an increase in financial inflows during H1-FY24. In addition, lower scheduled external loan repayments compared to H1-FY23 and significant reduction in current account deficit, on account of decline in imports as well as upsurge in exports supported the build-up in SBP’s FX reserves. Despite subdued domestic demand and decline in global commodity prices, states the Report, a combination of lingering structural issues, PKR depreciation compared to H1-FY23, increase in government spending, and supply shocks kept the National CPI (NCPI) inflation at elevated levels. A number of factors including higher input costs, 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, were responsible for the persistence in the core inflation during H1-FY24. The Report highlights that despite some improvement in macroeconomic indicators, economy continues to grapple with the structural bottlenecks. The major issues include limited savings, low investments in physical and human capital, weak productivity, stagnant exports, narrow tax base, and inefficiencies in PSEs. Additionally, political uncertainty exacerbates the situation through inconsistency in economic policies, weak governance and public administration, hindering investment and thus economic development. These underscore the need for policy reforms to ensure sustainable development over the medium to long-term.