SBP says GDP growth will remain lower than projected 3-4% rate

The devastating floods will be the main reason behind a GDP growth lower than previously projected rate of 3 to 4 percent during the current fiscal year, the State Bank of Pakistan said Wednesday.

But it is not just the central bank as World Bank has also predicted a 2.2 percent growth rate while the International Monetary Fund (IMF) mentioned a 3.5 percent rate without taking the impacts of the floods into account.

In the Annual report on the State of Pakistan Economy for 2021-22 (FY22), State Bank of Pakistan (SBP) said the flooding was likely to interrupt Pakistan’s real economic activity through various channels.

For this reason, the central bank feared that losses emerging from the damages to crops and livestock were likely to transmit to the rest of the economy through various backward and forward linkages.

In addition to this, the report said several corrective and other measures were likely to slow the momentum of economic activity during FY23, including a hike of 675 basis points in the policy rate, demand management measures announced in the previous fiscal year, and the government’s decision to unwind the fiscal package for fuel and electricity subsidies towards the end of FY22.

The large-scale destruction of infrastructure in the affected provinces might also undermine the growth prospects during the year, it added.

Meanwhile, the SBP said the economy was already in a stabilisation phase when widespread flooding hit a large part of the country at the start of the current fiscal year.

About FY22, the central bank said economic growth was stronger than expected in the previous fiscal year as real GDP increased by 6 percent compared to 5.7 percent a year ago.

The primary drivers of this growth were a broad-based expansion in large-scale manufacturing (LSM) and improved agricultural output, the report said.

“A combination of adverse global and domestic developments led to the re-emergence of macroeconomic imbalances during FY22,” it said.

However, SBP avoided providing any range for the growth rate of the current financial year apparently due to the worsening economic situation. Industries have either shut down or drastically cut their production due to high inflation and the unavailability of gas and electricity.

The report noted that the expansionary fiscal stance in FY22, an upsurge in global commodity prices, and the fallout of the Russia-Ukraine conflict led to a marked deterioration in the current account deficit.

In addition, the delay in the resumption of the IMF loan programme and political instability exacerbated the country’s vulnerability through the depletion of foreign exchange reserves.

The resulting rupee depreciation “amplified inflationary pressures by magnifying the effect of global price increase”, the SBP report said.

It said the experience from FY22 brought to the fore once again the need to address the country’s structural weaknesses, such as a narrow base of foreign exchange earnings and meagre inflows of foreign investment.

“A concerted approach is required to encourage increased localisation of the manufacturing base, along with the lowering of energy intensity of the economy by ensuring energy efficiency and conservation,” the report said.

Moreover, amid the growing issues related to climate change and inadequate food security situation, there is an urgent need to formulate a well-thought-out strategy to meet these challenges, it said.

It stressed that priority should be given to producing new varieties of seeds that are suitable to varying weather conditions and to devise a framework that focuses on water management strategies to increase agricultural productivity.

“The losses to agriculture produce induced by the recent floods is likely to step up the import of agriculture commodities, particularly cotton,” the report said.

It said the government had targeted to reduce the fiscal deficit to 4.9 percent of GDP in FY23 from 7.9 percent in FY22. “This outcome would be achieved through both revenue and expenditure measures,” it said.

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