Macroeconomic conditions in Pakistan improved during FY 2023-24 due to a range of reasons, including successful engagement with the IMF.
In its annual state of Pakistan’s economy report for the fiscal year 2023-24, the State Bank of Pakistan (SBP) said that apart from IMF engagement, the economy was also supported by stabilization policies, reduced uncertainty, and a favorable global economy. environment.
The report added that the increase in domestic agricultural productivity also contributed to relatively better macroeconomic results during the year.
Real GDP registered a moderate agriculture-led recovery in FY2024. Record harvests of wheat and rice and recovery in cotton production boosted agricultural production during FY2024.
The report stressed that despite the recovery in real economic activity, the current account deficit narrowed to its lowest level in 13 years, as strong growth in remittances and exports offset a slight increase in imports.
This, coupled with the Standby Agreement with the IMF that stimulated inflows from other multilateral and bilateral sources, helped build up foreign exchange reserves and calm sentiment in the foreign exchange market.
The gradual appreciation of the exchange rate during the year, coupled with higher-than-expected fiscal consolidation, led to a noticeable decline in the ratio of public debt to GDP in fiscal year 2024.
Monetary policy, inflation
The RBI maintained a hawkish monetary policy stance by keeping the interest rate unchanged at 22% for almost the entirety of FY24, the RBI report noted.
It also introduced reforms in foreign exchange companies, following administrative measures taken by the government to bring order to the foreign exchange and commodity markets. The government continued to control public finances, with the primary balance recording a surplus for the first time in 17 years.
The report stated that these factors, along with lower global commodity prices amid improved global economic activity and trade, had positive effects on key macroeconomic indicators.
Inflation fell from its peak of 38% in May 2023 to 12.6% in June 2024. It averaged 23.4% during FY2024, much lower than 29.2% in FY2023.
The continued decline in headline and core inflation in the latter half of FY24 has opened the way for the RBA to cut interest rates by 150 basis points to 20.5% in June 2024, he added.
Structural barriers
Despite these positive developments, the SBP report highlighted that a range of structural impediments continue to pose challenges to maintaining macroeconomic stability.
Low investment amid low savings, an unfavorable business environment, lack of research and development, and low productivity, coupled with climate change risks, continue to constrain economic growth potential.
In addition, long-standing inefficiencies in the energy sector have led to the accumulation of circular debt.
While the government began to address the energy sector challenges through significant price adjustments, there was a need to scale up these efforts by introducing sectoral policy and regulatory reforms.
These reforms were also necessary to address the issue of inefficiency in state-owned enterprises that continued to drain public finances, which were already constrained by the low tax-to-GDP ratio.
“Reform of state-owned enterprises”
Against this backdrop, the SBP report also included a special chapter on “SOE Reform in Pakistan” that highlights the country’s historical and current experience with SOE reforms.
The chapter also proposed measures for the success of the reform agenda, based on international best practices.
In addition to the necessary focus on sector policies, these also include effective implementation of the government’s recently introduced corporate reforms, creating a competitive environment, and ensuring effective regulation, supported by broad political consensus, the report said.
The economy is expected to improve
The SBP report highlighted that improvement in macroeconomic conditions in Pakistan in FY24 is expected to maintain momentum in FY25 as well.
The approval of the Extended Fund Facility (EFF) program with the IMF in September 2024 was expected to strengthen the country’s external account position, improve the sovereign credit rating, and boost investor confidence.
At the same time, the country was expected to benefit from a favorable global economic environment, as inflation in advanced economies declines, while global economic growth is expected to remain flat.
Moreover, although there are upside risks to global commodity prices due to escalating geopolitical tensions, commodity prices have continued to decline. These factors would keep the current account deficit within a range of 0%-1% of GDP in FY25, the report notes.
Inflationary pressures weaken
According to the report, continued fiscal consolidation efforts and the delayed impact of the tight monetary policy stance are expected to weaken inflationary pressures in FY25.
Moreover, recent results suggest that average inflation will fall below the previously expected range of 11.5%-13.5% in FY2025.
In addition, the State Bank of Australia report added that continued fiscal consolidation is also expected to support a further decline in inflation. Moreover, the relatively low cost of borrowing and gradual recovery in the FSA and services sector are expected to support real GDP growth in the range of 2.5% to 3.5% in FY25.