By Staff Reporter
KARACHI: Pakistan’s economy, which contracted last year amid a balance of payment crisis, has started to show early signs of improvement as an International Monetary Fund (IMF) loan program offered some relief, the central bank said on Monday.
The $3 billion standby arrangement from the IMF, secured in July, helped alleviate immediate risks and reverse the declining trend in foreign exchange reserves, the State Bank of Pakistan said in its annual report. The country also received $3 billion in bilateral inflows in July.
“After a year of turbulence, Pakistan’s economic situation has started to show some early signs of improvement,” the SBP said in its annual report on the State of Pakistan’s Economy for the fiscal year that ended on June 30.
“The country was able to secure a $3.0 billion Stand-By Arrangement (SBA) from IMF, towards the end of FY23, which helped in alleviating immediate risks to some extent. The initial disbursement of US$1.2 billion under the SBA in July 2023, alongside $3 billion bilateral inflows, helped reverse the declining trend in the SBP FX reserves.”
The bank expects real gross domestic product growth in the range of 2 percent to 3 percent in the fiscal year that started in July, maintaining its previous projection. That’s slightly below the government’s target of 3.5 percent and in line with the IMF’s estimate of 2.5 percent. The economy shrank 0.6 percent in the previous fiscal year.
“The high-frequency indicators are suggesting bottoming out of economic activity from July 2023,” the report said. “The withdrawal of guidance on import prioritization, alongside gradual ease in FX position, is expected to somewhat ameliorate supply chain situation and lift growth in large-scale manufacturing as well as exports.”
The central bank sees the pace of the economic recovery may be contained by the effects of various demand compression measures implemented in the previous two years. Moreover, an expected rebound in cotton and rice production will support agriculture growth in FY24.
The bank also expects inflation to moderate in the current fiscal year, projecting it to range between 20 percent and 22 percent, down from 29.2 percent in the previous year. The lagged impact of monetary tightening and other contractionary measures is expected to keep domestic demand in check, it said.
The current account deficit, which widened to 8.6 percent of GDP in the previous fiscal year, is expected to fall to 0.5 percent to 1.5 percent of GDP in the current year, as improved global and domestic growth prospects bolster foreign exchange earnings from exports of goods and services, the report said.
The budget deficit, however, is expected to remain high at 7 percent to 8 percent of GDP, compared with the government’s target of 6.5 percent. Higher interest payments may continue to prevent a notable reduction in spending, while a tepid recovery in economic activity may shore up revenue collection, it said.
Slightly improved global and domestic growth prospects are expected to bolster foreign exchange earnings from exports of goods and services. Although import volumes are likely to increase, lower commodity prices may prevent a significant expansion in imports bill during FY24.
Pakistan faces some important upside risks to its economic outlook, such as unforeseen climate events, adverse movements in global commodity prices, especially oil, and external account pressures, according to the report.
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