Washington January 11 2024: Monetary policy is expected to remain tight in Pakistan to contain inflation, while fiscal policy is also set to be contractionary, reflecting pressures from high debt-service payment states World Bank in its report.
In Pakistan, the economic outlook for FY2023/24 (July 2023 to June 2024) remains subdued, with growth projected at only 1.7 percent. Monetary policy is expected to remain tight to contain inflation, while fiscal policy is also set to be contractionary, reflecting pressures from high debt-service payments. Weak confidence stemming from political turmoil will contribute to the slow growth in private demand. As inflationary pressure eases, growth is expected to pick up to 2.4 percent in FY2024/25.
In Pakistan, output contracted an estimated 0.2 percent in FY2022/23 as a result of the effects of damage from the 2022 floods and increased political uncertainty. Consumer price inflation remained elevated, partly reflecting currency depreciation in early 2023. However, by late 2023, the rupee showed signs of stabilization, driven by a variety of factors. These included increased liquidity in the foreign exchange market due to tighter enforcement of regulations, a shrinking money supply, a balance of-payments surplus on account of low import demand, and a moratorium on Chinese debt repayments.
As poorer households spend more on food, rising food prices would disproportionately affect the poor and the vulnerable, resulting in an increase in poverty and inequality. The risk is particularly high in countries with limited fiscal buffers to mitigate adverse effects, including Nepal and Pakistan, and in countries under major security threats, including Afghanistan.
External and fiscal financing needs are elevated in several SAR economies, including Maldives, Pakistan, and Sri Lanka, increasing vulnerabilities to financial market disruptions. In these economies, market sentiment can suddenly shift in response to financial sector stress or weakening fiscal positions. Vulnerability to such shifts is particularly high in countries with limited international reserves or fiscal buffers, or weak governance in the financial sector.
