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SBP Projects Substantial Decline in Pakistan’s Economic Growth, Citing Control Measures and Flood Impact


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The State Bank of Pakistan (SBP) has provided a grim assessment of the country’s economic prospects, stating that growth for the current fiscal year will fall significantly short of the previously revised projection of around 2%. This stands in stark contrast to a few research houses’ forecasts, which predicted a contraction in the fiscal year ending on June 30, 2023.

According to the SBP’s half-yearly report on Pakistan’s economy from July to December 2022, released on Friday, the country has experienced a general slowdown in economic activity due to underperformance in the agriculture and industrial sectors, which in turn negatively affected the services sector.

The measures implemented to control demand and the devastating floods of 2022 have weighed heavily on the growth outlook for FY23. The SBP also anticipates elevated inflation levels ranging from 27% to 29%, compared to approximately 12% in the previous fiscal year. Despite a significant improvement in the current account, the balance of international payments remains vulnerable, while revenue collection is expected to remain low and the fiscal deficit to spike.

The SBP notes that tight liquidity supplies in global markets pose risks of a further slowdown in workers’ remittances and export earnings. The projections and analysis in the report were based on data from July to December FY23, finalized in March 2023.

On the fiscal front, the SBP highlights the deceleration in tax collection by the Federal Board of Revenue (FBR) due to temporary import restrictions and subdued economic activity. This, combined with higher interest payments on public debt, has resulted in a narrowing of fiscal space. Consequently, the contraction in federal development expenditures to contain fiscal deterioration poses challenges for the economic outlook of FY23.

The anticipation of a further slowdown in economic activity, coupled with monetary tightening and demand-curtailing measures, is likely to impede the current growth momentum for tax collection, leading to a widening fiscal deficit.

Although there has been a substantial improvement in the current account deficit in the first half of FY23, external account pressure continues due to scheduled debt repayments and lower foreign inflows, resulting in a significant drawdown in foreign exchange reserves. Considering prevailing macroeconomic uncertainty, the impact of floods, and the global interest rate environment, external account vulnerabilities are expected to remain elevated in FY23.

The resumption of the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) would help alleviate external sector concerns by increasing access to multilateral and bilateral financing sources, according to the SBP.

Downside risks to the external sector outlook include a sharper-than-expected global demand slowdown that could negatively impact exports and workers’ remittances, while global and domestic uncertainties also pose risks. On the positive side, an exceeding slowdown in domestic demand or a significant decline in global commodity prices could improve the current account deficit.

The SBP expects inflation to remain elevated in the range of 27% to 29% in FY23, primarily driven by persistent increases in food and energy prices. Various factors, such as exchange rate depreciation, fiscal adjustments, and upward inflation expectations, contribute to the near-term risks associated with inflation.

Pakistan’s macroeconomic conditions have deteriorated in the first half of FY23, despite some improvements in the external account and fiscal balances. Uncertainty regarding the completion of the IMF program, insufficient external financing, and low foreign exchange reserves remain significant concerns, exacerbated by the aftermath of flash floods and political instability.

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