Inflation envisaged at 20% for next fiscal year

The government may set targets of economic growth at 3.5% and inflation at biting 20% for the next fiscal year -which appear realistic but still face risks of slippages due to political instability and weaknesses of institutions and economic fundamentals, reveals a draft of an official report.

The Medium-Term Economic Framework for fiscal year 2023-24 to 2025-26 is being prepared as part of next fiscal year’s budget, which the coalition government is planning to unveil on June 10-Saturday, according to the government sources.The draft report, which still has to pass through the process of multitier executive approvals during the next month, admits that “reducing the current inflationary pressures will take some time”.

For the first time, the Finance Ministry also concedes that during the outgoing fiscal year the economic growth rate may remain around 0.8%, the lowest in four years.After couple of rounds of consultations with all the stakeholders, the Finance Ministry has proposed to set the Gross Domestic Product (GDP) growth rate at 3.5% for fiscal year 2023-24, starting from July.

The proposed rate is in line with the projections made by three international financial institutions but is half of the pace needed to reduce unemployment and poverty in Pakistan.The country is passing through one of the worst economic crises of its history and the revival of the International Monetary Fund programme does not appear in sight due to the government’s failure to implement outstanding conditions.The sources said that the target of average inflation rate for the next fiscal year is proposed at 20%. For this fiscal year the government had targeted to restrict the pace of inflation at 11.5%.

But the draft report showed that the average inflation rate may remain at 28.5% on back of 50-year record annual inflation in March this year.“The government admits that reducing the current inflationary pressures will take some time and should not be done at the expense of a recession” -states the report, which appears suggesting that the authorities should not follow the contractionary monetary policies.From fiscal year 2024-25, the report suggested the pace of inflation slowing down to 7.5%. It added the actions implemented should steadily lower the inflation rate's future course to 6.5% by FY2026, which is more in accordance with steady and sustainable economic growth.

But in the medium term, the growth projection is set at 3.5% for next fiscal, 5% for fiscal year 2025 and 5.5% in 2026. This is conditioned with price stability and fiscal and external sector sustainability.The proposed economic growth rate is in line with the average growth that Pakistan attained during past five years.

Between fiscal year 2019 and fiscal year 2022 (PTI era), Pakistan's GDP grew by 3.5% on average with fiscal year2022 recording the highest growth rate at 6% and the lowest negative 0.94% in fiscal year 2020 post COVID-19.RisksHowever, there are many risks to these targets. The instability on the political front poses significant threats to economic performance by creating uncertainty among economic agents, investors and the business community, according to the draft report prepared by the Economic Advisor Wing of the Finance Ministry.

These challenges have been compounded by the complex policy environment surrounding the country, internal security, geopolitical conditions, and regional and global challenges are hindering investors to make timely investment decisions, it added.Some of the key challenges facing Pakistan's economy include high inflation, a large current account deficit, low foreign exchange reserves, a high debt burden and weak institutions.The draft report showed that the pass-through of energy prices will have some dampening effect on activity while fiscal consolidation and the loss of purchasing power due to high inflation are expected to restrain domestic demand notably.Sectoral breakupFor the outgoing fiscal year, the government has now estimated the economy slowing down to 0.8% as against the official target of 5.1%. The agriculture sector will contract by 0.7% in this fiscal year due to floods and crop damages.

But it is projected to recover to 3.2% in next fiscal year.Due to economic stabilization measures, tight financial conditions along with impact of floods and downside risks to global economic activities, Industrial sector may contract by 1.5% in this fiscal year. However, with modest domestic and global economic recovery, gradual reduction in the policy rate and lifting of import restrictions, the industrial sector is targeted to grow to 3.4% in the next fiscal.Services Sector is projected to grow by 2.1% in this fiscal -the only sector showing growth – but is targeted to grow at a pace of 3.6% in next fiscal year.The draft report stated that economic activity has been disrupted, livelihoods have been severely impacted, with poverty expected to increase during the outgoing fiscal year due to floods and contractionary economic policies.Catastrophic monsoon rains and floods devastated most of the country, particularly the southern part.

Floods destroyed important agricultural infrastructure, crops, livestock, household food supplies, and agricultural land and crops. According to the production estimates of Important Crops for FY 2023, Cotton production reduced by 24.6% to 6.3 million bales as against the target of 11 million bales.Rice production declined by 40.6% to reach 5.5 million tons compared to the target of 8.5 million tons.  Sugarcane was reduced by 7.9% to 81.6 million tons against 88.7 million tons last year while it is the only Kharif crop that surpassed the target of 76.9 million tons.