KARACHI: The State Bank of Pakistan (SBP) presented its half-yearly report on the state of the economy on Friday. The report covers economic performance and difficulties encountered in both the domestic and international sectors.
According to an SBP news release, notwithstanding policy-induced improvements in the external current account and primary fiscal balance, Pakistan’s macroeconomic circumstances deteriorated during H1-FY23, according to the report’s analysis based on data out-turns for July to December 2022–23.
The report noted that during H1-FY23, negative global economic conditions, uncertainty over the outcome of the IMF (International Monetary Fund) program’s 9th review, insufficient external financing, and low levels of foreign exchange reserves persisted as major concerns, which were made worse by the effects of flash floods and political instability.
“Specifically, both agriculture production and large scale manufacturing (LSM) contracted; whereas, headline inflation rose to multi-decade high level,” it added.
The SBP increased the policy rate by an additional 225 basis points in the first half of FY23, on top of the 675 bps rise during FY22, to address the issues, while the government reduced federal spending on grants, subsidies, and development, according to the report.
The government and the SBP have established numerous regulatory steps to limit imports in order to minimize pressures on the external balance.
According to the report, high global commodity prices, elevated inflation expectations, and a variety of domestic factors drove the national consumer price index (NCPI) inflation to 25.0 percent during H1-FY23 as opposed to 9.8 percent in the same period last year. This was despite a clearly visible contraction in domestic demand.
Overall inflation was primarily driven by higher food prices due to supply shortages brought on by floods, followed by NFNE and energy groups. The SBP noted that the depreciation of the Pakistani rupee, as well as increases in power prices and tariffs, gave inflationary pressures even more of a boost. It also noted that the second-round effects of these supply shocks on broader prices and wages, as well as rising inflation expectations, drove up core inflation.
The report’s coverage of the fiscal sector emphasized how the decline in main non-interest current spending, particularly on grants, subsidies, and development spending, helped to strengthen the primary surplus during H1-FY23.
However, it noted that a substantial increase in interest payments meant that the budget deficit, as measured by GDP (gross domestic product), remained at the same level as last year.
A sharp decline in imports and a general decline in economic activity limited tax collection below the target for the first half of FY23, despite tax administration efforts, inflation, and higher return on deposits leading to an expansion in FBR (Federal Board of Revenue) taxes.
The SBP stated that the government generally relied on domestic bank and non-bank sources to cover its borrowing requirements in the absence of substantial external inflows, typically through medium term floating rate instruments.
As the economy slowed down during H1-FY23, the growth of working capital loans inside the PSC also slowed, but fixed investment remained roughly at last year’s level.
The external sector, in general, and external financing, in particular, were impacted by the uncertainly surrounding the IMF program’s restart and the challenging global financial environment throughout the review period.
In the meantime, the crisis between Russia and Ukraine and China’s “zero-covid” policy hindered global demand, which also had an impact on Pakistan’s export performance.
On the supply side, the analysis found that decreased agricultural yields were caused by flood-related interruptions, which not only hurt food exports but also worsened the forecast for commodity imports.
Workers’ remittances decreased during H1-FY23 despite the global economic slowdown and increased use of informal channels, but the report noted and added that the decrease in exports and remittances was more than offset by a much larger decline in imports, leading to a noticeable decline in current account deficit (CAD).
Despite the CAD’s improvement, the report pointed out that the lack of financial inflows caused the foreign exchange reserves to fall between H1 and FY23.
External account pressures were exacerbated by larger net FX outflows due to scheduled debt repayments and disinvestments, as well as delays in the IMF tranche distributions and political unrest in the nation.
During H1-FY23, the PKR depreciated as a result of the developments’ combined impact and the US dollar’s advance versus a basket of other currencies.
The report shed light on the enabling policies that had facilitated growth in that space and some of the critical gaps that were to be addressed, if recent growth in the sector was to be sustained, while also drawing attention to the country’s small share in global IT (information technology) exports and negligible domestic software usage.
