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Dropping Low Inflation Rate Pakistan
PhotoNews Pakistan > Business > Pakistan’s Economic Challenges: GDP growth projected to be 0.8%
Business

Pakistan’s Economic Challenges: GDP growth projected to be 0.8%

Web Desk
By Web Desk Published April 27, 2023 4 Min Read
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An image displays the flag of Pakistan with a graph illustrating a decline in the inflation rate.
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Significant debt sustainability indicators have deteriorated in the first half of the current fiscal year (from July to December), leading to governmental concerns shared on Wednesday.

The gross financing needs are expected to stay high due to elevated interest rates and stress on the foreign account. Furthermore, inflation is projected to average 28.5% this year and persist at 21% in the coming fiscal year.

On Wednesday, the Ministry of Finance’s Economic Advisory Wing presented its “Debt Sustainability Analysis (DSA) Report.” The report emphasized that the public debt situation remains precarious. The DSA’s IMF thresholds for the debt and GFN-to-GDP (gross financing needs to gross domestic product) ratios are exceeded under both baseline and shock scenarios in FY23, thus indicating a high risk.

Stress-test analysis indicated that the public debt ratio would remain above the 70% of GDP threshold until FY26 in the event of negative exchange rate shocks, the most severe scenario. Furthermore, macro-financial and standardized contingent liability disruptions could lead to a debt-to-GDP ratio exceeding 70%. As a result, the government reduced its GDP growth rate forecast from 5% to 0.8% for the first time, slightly higher than the IMF, World Bank, and Asian Development Bank’s projections of 0.4 to 0.6%.

The report acknowledges an anticipated inflation rise to an average of 28.5% in FY23 due to a volatile political and economic environment, the effects of currency depreciation, and increased energy prices, with an expected persistence at 21.5% in FY24. However, the Ministry of Finance forecasts a decrease in inflation to 6.5% over the medium term, assuming a stable exchange rate, improved agricultural outlook, political stability, and a high base effect.

Considering the global situation, the government concedes that curtailing the current inflationary pressures will take time and should not result in a recession. Nevertheless, the measures implemented should gradually lower the future inflation path to 6.5% by 2026, more aligned with steady and sustainable economic growth.

As of December 2022, the total public and publicly guaranteed debt amounted to Rs55.8 trillion – a 7% increase from the end of FY22. This surge is attributed to the heightened interest burden from the high-interest rate environment and the 11% depreciation of the Pakistani Rupee against the U.S. dollar in the first half of FY23. Domestic debt accounted for 62.8% of the total public debt, with external debt making up the remainder.

Completing the 7th and 8th reviews under the IMF Extended Fund Facility (EFF) led to a disbursement of $1.166 billion during the first half of FY23. Additionally, the government received $1 billion in a rollover from China, a $3 billion Saudi time deposit, and $3.298 billion from multilateral organizations. In contrast, $2.72 billion in international commercial loans and $1 billion in international Sukuk maturities were repaid.

Due to the Rupee’s depreciation and the primary deficit, the total public and publicly guaranteed debt to GDP ratio increased from 75.8 to 78.0% in FY22. As a result, domestic debt primarily financed the fiscal deficit.

The report stated that due to catastrophic floods, a stringent monetary stance, fiscal consolidation, and an unfavorable global economic environment, “Real GDP growth is projected to be 0.8% in FY23.” It expects the growth rate to rise to 5.5% in FY26, which requires coordinated efforts between federal and provincial governments to ensure sustainable economic development. The Economic Advisory Wing anticipates a medium-term growth between 3.5% and 5.5%, alongside price stability and fiscal and external.

TAGGED:FeaturedPakistan GDP
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