Political uncertainty, inconsistent policies exacerbated economic situation: SBP

KARACHI: Political uncertainty and inconsistency in economic policies exacerbated the economic situation in Pakistan during the first six months of the current fiscal year (2023-24), the State of Pakistan (SBP) said on Tuesday.

In its Economy Report for H1 FY24, the SBP said that despite some improvement in macroeconomic indicators, the economy continued to grapple with 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,” the report read.

It added that weak governance and public administration also hindered investment and economic development. The report underscored the need for policy reforms to ensure sustainable development over the medium to long term.

‘IMF’s SBA reduced stress on external account’

According to the report maintained that the real economic activities moderately recovered against the contraction last year, while Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) helped reduce stress on external account.

Meanwhile, the current account deficit narrowed considerably, amid continued contractionary monetary and fiscal policies.

On the fiscal side, the 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 an increase in non-interest expenditure.

As per the report, despite restrained domestic demand, inflationary pressures remained persistent at elevated levels. The real GDP, driven by agriculture sector, grew by 1.7 percent during the period.

The report noted that the withdrawal of import prioritisation measures improved the availability of raw materials for industry. 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 a 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.

Modest economic recovery expected

The report expected continuation of modest economic recovery in the second half of FY24. In the backdrop of improvements in business confidence, high frequency demand indicators since November 2023, and prospects for good wheat production during FY24, the SBP projects real GDP growth in the range of 2 – 3 percent for FY24.

The SBP’s report also contained a special chapter that analyses long-term trends in inflation and its determinants in Pakistan. The chapter also sheds light on policy and structural factors influencing inflation including monetary policy framework, fiscal and debt policy, trade openness, agricultural efficiency, productivity and demographic trends.

The chapter concluded that reducing political and policy uncertainties and more fiscal consolidation can help bring inflation down at a faster pace in the short run. The chapter also emphasised on addressing longstanding structural issues to achieve low and stable inflation over the medium term, without overburdening monetary policy and the consequent high economic costs.

Inflation to remain 23-25%

The NCPI inflation, on the other hand, is expected to remain downward trajectory despite uncertainties persisting in both domestic economy and international commodity market.

Keeping these developments in view, the SBP projected the average NCPI inflation in the range of 23.0 – 25.0 percent for FY24, lower than 29.2 percent in FY23, and is expected to come down to 5 – 7 percent range by September 2025.