Islamabad December 5 2022: Growth in Pakistan’s flood-hit economy will probably grind very close to a halt this fiscal year -- and that’s assuming the International Monetary Fund delivers loans needed to avoid debt default, reported by Bloomberg.
Given the summer’s devastating floods, we expect the IMF to loosen its loan requirements and finally commit to aid after weeks of delay. This is key to securing other loans needed to cover the country’s debt payments and import bills.
Even with this help, we forecast GDP growth slowing sharply to 0.3% in the year through June, down from 6% the prior 12 months. Favorable base effects should yield a 3.3% expansion in fiscal 2024.
Inflation is already slowing, although earlier fast readings will lead to an average of 23% this fiscal year, about double the previous year’s pace. In fiscal 2024, we expect inflation to slow to 8%.
Cooling prices will allow the State Bank of Pakistan to hold its policy rate steady at 16% for the rest of this fiscal year at least.
Politics are the main risk to this scenario. A swing toward populist policies to woo voters before 2023 elections could irk the IMF and get aid suspended. We expect the government to resist the temptation to spend beyond its means, but the rising popularity of opposition leader Imran Khan adds pressure.
Sharp Slowdown in Fiscal 2023
Pakistan has suffered its most devastating floods in recent memory. Planting of key wheat crops have been delayed and factory production disrupted. The recovery faces other headwinds:
Rate hikes from the central bank totaling 900 basis points this cycle are damping demand. So are austerity measures imposed by the IMF as a condition for loans.
Industrial production is being crimped by import restrictions on machinery and intermediate goods needed to keep the current account manageable.
Businesses are likely to delay investment until elections determine whether the current government stays in power. Opposition leader Imran Khan is a critic of the IMF package and a proponent of more subsidies and lower taxes. Khan is calling for early elections.
Looming recessions in the US and Germany -- Pakistan’s biggest overseas markets -- will likely hit exports in 2023
Inflation should continue to slow next year -- along with growth. The central bank will likely keep rates on hold.
Food prices should fall once the country clears up from the floods and supplies rebound.
Softening demand and weaker global commodity markets will also help.
The possibility of sharp rupee depreciation brought on by any suspension of IMF aid would cause inflation to heat up again -- an upside risk to our projection.
We think the central bank has tightened too much already. In November, it unexpectedly raised rates by 100 bps. The move was probably aimed at curbing growth even more to contain the current account deficit and preserve the country’s dwindling FX reserves while it waits for IMF aid.
State Bank to Remain on Hold for the Rest of Fiscal 2023