ISLAMABAD:
Pakistan has informed the International Monetary Fund (IMF) that it expects the economy to grow by 3.1% and the current account will be largely balanced in this fiscal year on the back of higher remittances and the economic stabilisation policies will continue in the next fiscal year.
For the next fiscal year, the government may allow the economy to grow to 4.5% and a current account deficit of $3 billion compared to close to zero deficit in this fiscal year, according to a briefing to the IMF on the country’s macroeconomic framework.
The Ministry of Finance on Friday briefed the global lender about the macroeconomic projections for the ongoing fiscal year 2024-25 and the next fiscal year 2025-26, laying out a sustainable and steady path of economic growth.
The global lender did not immediately share its mind with the government and another meeting is expected next week as part of ongoing parley under the first review of the $7 billion Extended Fund Facility.
For the next fiscal year, the IMF was told that the government may set the economic growth target at 4.5% and the inflation target at 7%. But these figures remain tentative until they are approved by the federal cabinet and the National Economic Council.
According to the Finance Ministry’s briefing to the IMF, the economy may grow at a rate of 3.1% during the current fiscal year, which is lower than the official target of 3.6% but is largely in line with the predictions by the international financial institutions.
The Finance Ministry’s assessment says that the agriculture sector may grow only 1.3% and the major push for the growth will come from the services sector, said the sources.
However, the economy remains vulnerable to natural disasters and climate risks, including floods and droughts disrupting agriculture and infrastructure which can threaten food security and fiscal stability, thus hampering economic growth.
The agriculture sector is also facing the adverse impact of abnormal weather patterns and wheat production is expected to be much less than the official target of 27.9 million tons this year.
The wheat has been sown on an area of 22.1 million acres, which is below the target and may result in shortages, according to the Ministry of National Food Security and Research officials. They said that it was too early to say anything with certainty but the wheat production may fall below 27 million tons due to weather variability. Last year, the production was 31.4 million tons.
Major General (retd) Shahid Nazir, the Director General of military-backed Green Corporate Initiative, had told the special federal cabinet meeting on Tuesday that this year “bumper wheat production” was expected.
The major adverse impact of the weather has been on the cotton crop whose production is estimated at only 7.2 million bales, which is 30% or three million bales less than the last year. The country’s average annual cotton consumption requirement is estimated at least at 12 million bales. The gap is filled through imports, which is a burden on the thin foreign exchange reserves.
The economic activity remained subdued during the first quarter of this fiscal year, as the economy grew at only 0.92% rate.
Pakistan’s renowned economist Dr Hafiz Pasha wrote this week that unemployment had risen to 22% in 2023, mainly because of the adverse impacts of the 2022 floods.
The IMF was informed that the industrial sector may grow by 2.9% on the back of some growth in the manufacturing sector, slaughtering and construction sectors.
However, large scale manufacturing remains in the red and its growth may remain flat to negative. The IMF was told that the LSM growth outlook hinges on both external and domestic factors, with global demand and local policies setting the stage for recovery.
The services sector can grow by 3.9% in this fiscal year and will be a key behind the overall 3.1% economic growth rate.
The sources said that the crux of the briefing to the IMF was that the country will follow the path of sustainable economic policies and the hard-earned stabilization will not be lost.
Inflation
The government has estimated that the inflation may remain in the range of 6% to 7% in this fiscal year far lower than the official target of 12%. One of the key reasons for less than targeted inflation is high base impact, stable exchange rate and stable non-perishable food prices.
For the next fiscal year, the government also expects inflation remaining in the same trajectory.
Overall, the Finance Ministry sees the nominal economic growth of 11.5% in this fiscal year but the experts say that the number may remain in the single digit as both inflation and GDP growth rate might be lower than the revised projections.
The nominal economic growth is critical for the FBR’s likely downward revised revenue collection target, which is expected to be revised down to Rs12.48 trillion. During the first eight months, the FBR pooled Rs7.34 trillion and missed the target by Rs606 billion.
External Sector
The government informed the IMF that the current account will be marginally negative in this fiscal year, ranging from $130 million to $500 million or 0.1% of the GDP in deficit. This is far better than last year’s low deficit of $1.7 billion.
However, the government has curbed imports to keep the current account in balance, as it still does not have the luxury of having a larger deficit due to shortage of foreign currency.
For the next fiscal, the government told the IMF that it sees the deficit in the vicinity of $3 billion or 0.7% of the GDP, said the sources. The sources said that high levels of exports, contained imports, primary income, and workers’ remittances are the key reasons behind the negligible current account deficit in this fiscal year.
Exports are projected at $33 billion for this fiscal year while the imports may grow to $59 billion, the IMF was told by the government.
The government claimed before the IMF that the food-related import bill will not put significant pressure on the overall import bill, as the country has enough domestic production and strategic reserves to meet the domestic demand.
For this fiscal year, workers’ remittances are projected in the range of $36 billion to $37 billion far higher than the target and a key reason behind a balanced current account, said the sources.
