Pakistan’s macroeconomic conditions saw improvement in the fiscal year 2023-24, driven by several factors, including effective collaboration with the International Monetary Fund (IMF).
In its Annual Report on the State of Pakistan’s Economy for the fiscal year 2023-24, the State Bank of Pakistan (SBP) said that apart from the IMF engagement, the economy was also supported by stabilisation policies, reduced uncertainty, and favourable global economic environment.
The increase in domestic agricultural productivity also contributed to relatively better macroeconomic outcomes during the year, the report added.
The real GDP registered a moderate agriculture-led recovery in FY24. A record harvest of wheat and rice, and a rebound in the production of cotton mainly provided a boost to agricultural output during FY24.
The report highlighted that despite a recovery in real economic activity, the current account deficit further narrowed to a 13-year low as strong growth in remittances and exports more than offset a slight increase in imports.
This, coupled with the Stand-By Agreement with the IMF that catalysed inflows from other multilateral and bilateral sources, helped in the build-up of FX reserves and calming sentiments in the foreign exchange market.
The gradual exchange rate appreciation during the year, together with higher-than-envisaged fiscal consolidation, led to a notable decline in public debt to GDP ratio in FY24.
Tight monetary policy
The SBP report noted that the SBP maintained a tight monetary policy stance by keeping the policy rate unchanged at 22% for almost the entire FY24.
It also introduced reforms in foreign exchange companies, following administrative actions by the government to bring order in foreign exchange and commodity markets. The government continued the fiscal consolidation, with the primary balance posting a surplus for the first time in 17 years.
These, together with the decline in global commodity prices amid improved global economic activity and trade, had positive bearings on key macroeconomic indicators, the report highlighted.
The inflation dropped from its peak of 38% in May 2023 to 12.6% in June 2024. It averaged 23.4% during FY24, considerably lower than 29.2% in FY23.
A consistent decline in headline and core inflation in the latter half of FY24, created room for the SBP to reduce the policy rate by 150 basis points to 20.5% in June 2024.
Challenges to sustaining stability
Notwithstanding these positive developments, the report said that a host of structural impediments continued to pose challenges to sustaining macroeconomic stability.
Falling investment amid low savings, unfavourable business environment, lack of research and development, and low productivity, alongside climate change risks continued to constrain the economy’s growth potential.
In addition, longstanding inefficiencies in the energy sector resulted in the accumulation of circular debt.
While the government started to address energy sector challenges through substantial price adjustments, there was a need to broaden the scope of these efforts by introducing sectoral policy and regulatory reforms.
These reforms were also necessary to address the issue of inefficiencies in the State-owned Enterprises (SOEs) that continued to be a drain on fiscal resources, which were already constrained by low tax-to-GDP ratio.
‘Reforming SOEs’
Against this backdrop, the SBP report also included a special chapter on ‘Reforming SOEs in Pakistan’ that sheds light on the country’s historical and current experience of SOE reforms.
The chapter also proposed measures for the successful reform agenda, based on international best practices.
In addition to the necessary focus on sectoral policy, these also included effective implementation of the recently introduced corporate government reforms, creating a competitive environment, and ensuring effective regulation, supported by broad political consensus, the report said.
Current account deficit
The SBP report added that the improvement in Pakistan’s macroeconomic conditions in FY24 was expected to maintain the momentum in FY25 as well.
The approval of the Extended Fund Facility (EFF) program with the IMF in September 2024 was anticipated to further strengthen the country’s external account position, improve sovereign credit rating, and enhance investor confidence.
At the same time, the country was expected to benefit from a conducive global economic environment, as inflation was falling in advanced economies, while global economic growth was expected to remain steady.
Moreover, while there were upside risks to global commodity prices due to rising geopolitical tensions, commodity prices continue to be low. These factors would keep the current account deficit within the range of 0%–1% of GDP in FY25.
Inflationary pressures
According to the report, the continuation of fiscal consolidation efforts and the lagged impact of the tight monetary policy stance were anticipated to further weaken the inflationary pressures in FY25.
Further, the recent outturns suggested the average inflation to fall below the earlier projected range of 11.5%– 13.5% in FY25.
In addition, the continued fiscal consolidation was also expected to support a further decline in inflation.
Furthermore, relatively lower borrowing cost, and a gradual recovery in LSM and services sector were projected to support real GDP growth in the range of 2.5%–3.5% in FY25.
