Manila April 6 2022: GDP growth is projected to moderate to 4.0% in FY2022 and to 4.5% in FY2023, according to report published by Asian Development Bank (ADB).
Slower growth in the current fiscal year reflects the government reactivating its stabilization program under the International Monetary Fund Extended Fund Facility to narrow the current account deficit, raise international reserves, and cut inflation. Domestic demand is expected to slow from monetary tightening, restrictions on automobile financing, and additional fiscal consolidation measures enacted in January 2022. The forecast for accelerated growth in FY2023 reflects stronger private consumption and investment, as key structural reforms and greater macroeconomic stability boost household and business confidence.
The government’s package of subsidized inputs and increased support prices of wheat and sugarcane will continue to benefit agriculture in the current fiscal year. But industry growth will decelerate, reflecting fiscal and monetary tightening, a significant depreciation of the local currency resulting in costlier imports of raw materials and capital goods, and upward adjustments to domestic oil and electricity prices. Large manufacturing, which accounts for over half of industry, has weakened since September 2021, with growth slowing to 3.5% in the first 5 months of FY2022 from 6.9% in the same period of FY2021. Construction, however, is expected to support industry, helped by robust public investment spending and fiscal incentives, and subsidized credit under the government’s Naya Pakistan Housing Programme. Growth in services is expected to be trimmed by a slowdown in manufacturing and the implementation of the government’s stabilization program, weakening this sector’s contribution to growth in FY2022.
Inflation is expected to pick up in FY2022, averaging 11.0%. Headline inflation accelerated to 10.5% in the first 8 months, reflecting higher international energy prices, significant currency depreciation, and elevated global food prices from supply disruptions. Core inflation in rural areas rose to 9.4% and 7.8% in urban areas in February 2022, levels that reflect the ongoing economic recovery. Because Pakistan is a net importer of oil and natural gas, with both comprising almost 20% of total imports, the country will continue experiencing strong inflationary pressure for the rest of the current fiscal year from the jump in global fuel prices related to the Russian invasion of Ukraine. A prolonged conflict could raise wheat prices and stoke higher food inflation since Ukraine is an important source of Pakistan’s wheat imports. Additional tax measures in January 2022 will cause a one-time rise in prices. Inflationary pressures are likely to be less pronounced in FY2023 as fiscal consolidation progresses and oil and commodity prices stabilize, allowing inflation to moderate to a forecast 8.5%. The central bank tightened monetary policy in response to rising inflation and fast-growing external imbalances, especially during the second quarter of FY2022, raising the policy interest rate by a cumulative 275 basis points. The State Bank of Pakistan Act was amended in January 2022 to strengthen the central bank’s autonomy; the act mandates price stability as the monetary authority’s primary objective. The act prohibits the government from borrowing directly from the central bank, which should help anchor lower inflation expectations in FY2023.
The government plans to continue its medium-term fiscal consolidation, rationalizing less essential current spending and expanding tax and nontax revenue. These reforms are projected to trim the fiscal deficit to 5.7% of GDP in FY2022 and 5.5% in FY2023, return the public debt to more sustainable levels, and reduce the crowding out of private sector borrowing. Sustained recovery boosted Federal Board of Revenue (FBR) tax collection by 30.4% in the first 7 months of FY2022, equal to 6.2% of GDP, surpassing the 5.7% target for the period. For the first half of FY2022, total fiscal revenue rose from 6.0% to 6.2% of GDP, reflecting a higher contribution from sales and income tax that offset a shortfall in the petroleum levy.
The renewed buoyancy of fiscal revenue is expected to strengthen further on the tax measures enacted in January 2022, planned further increases in petroleum levy rates, and additional policy and administrative measures to broaden the tax base. These measures include launching a track-and-trace system, the continued rollout of the point-of-sale system in the retail sector and its integration with the FBR, introducing a single sales tax portal for the FBR and provincial revenue authorities, and reviewing property valuations to bring them closer to market rates. Total government expenditure rose to 8.3% of GDP in the first half of FY2022, due to higher subsidies, from 8.1% in the same period of FY2021, bringing the first half fiscal deficit to 2.1% of GDP.
The current account deficit is projected to widen to 3.5% of GDP in the current fiscal year as strengthening domestic demand and rising international energy and commodity prices propel import costs, outpacing export growth. The 55.1% surge in merchandise imports in the first 7 months of FY2022, which exceeded export growth of 27.4%, reflects rising global commodity (especially energy) prices, COVID-19 vaccine procurement, and greater demand for intermediate goods due to the domestic economic recovery. Services imports rebounded by almost 40.0%, reversing a 24.0% contraction in the first 7 months of FY2021. Services imports were underpinned by easing global travel restrictions and higher payments for transport and financial services linked to the surge in merchandise imports. Consequently, the deficit in goods and services widened from 4.0% of GDP in the first 7 months of FY2021 to 6.7% in the same period in FY2022, turning a current account surplus equivalent to 0.3% of GDP in the first 7 months of FY2021 to a deficit of 3.1% of GDP a year later
Rising global prices of energy, food, and other commodities due to the Russian invasion of Ukraine will continue to make imports costlier. But monetary tightening and the additional fiscal consolidation measures are expected to cool domestic demand, slowing import growth. Remittances are projected to remain buoyant, supported by the Roshan Digital Account initiative and the recovery in the global economy, providing a major source of foreign currency inflows ($15.8 billion in the first 6 months of FY2022) (Figure 3.20.12). The current account deficit is projected to narrow to 3.0% of GDP in FY2023 as stabilizing commodity prices and continued fiscal consolidation slow import growth.