Growth hinges on external sector

ISLAMABAD:

Pakistan’s economic revival and chances of achieving 3.5% growth in the next fiscal year hinge on the government’s ability to manage the external debt and current account, according to internal documents of the Ministry of Planning.

A draft working paper of the Annual Plan Coordination Committee (APCC) suggests inflation target of 21% and current account deficit target of 1.7% of gross domestic product (GDP), or roughly $6.5 billion, for fiscal year 2023-24, starting July.

The projected current account gap is roughly $2.7 billion less than what the Ministry of Finance was earlier targeting.

The APCC, which is chaired by Minister for Planning Ahsan Iqbal, is set to meet on Friday to approve fiscal year 2023-24’s annual macroeconomic plan and the Public Sector Development Programme (PSDP) allocation. These figures will be presented to the PM-led National Economic Council (NEC) for endorsement.

The working paper does not depict a healthy picture of the economy for the next fiscal year and the GDP growth target of 3.5% also depends on many factors.

The document underlined that high interest rates, double-digit inflation and exchange rate uncertainties posed major risks to economic revival next year.

The government has claimed 0.3% GDP growth for the current fiscal year, which has become disputed due to glaring data inconsistencies.

The planning ministry stated that the outgoing fiscal year had “major macroeconomic imbalances including the highest-ever public debt level, dwindling foreign exchange reserves, currency depreciation, mounting trade deficit, massive circular debt, and higher fiscal and current account deficits”.

These reasons appear as a charge sheet against the Ministry of Finance that is claiming that the economy is heading towards stability. The working paper stated that next year’s economic outlook and the revival of growth hinged on addressing the key issues pertaining to external account and external debt management.

It added that the revival was also conditioned on macroeconomic stability with intricate balance between growth and stability in monetary and fiscal policies amid expected fall in global oil and commodity prices and political stability.

The planning ministry hoped that the budget deficit would narrow down in the next fiscal year on the back of fiscal consolidation measures with a focus on curtailing subsidies and energy sector’s circular debt. But it said that the monetary policy stance would remain aligned with the objectives of growth revival and inflationary expectations.

The external sector is expected to improve on the back of falling global commodity prices. The ministry stated that the market-based exchange rate and easing of administrative import controls were expected to improve the performance of export industries next year.

The projected current account deficit of 1.7% of GDP is higher than this year’s expected gap of 1.1%. However, in case of an IMF programme, the global lender will not allow the government to keep import restrictions in place, which will lead to a higher-than-projected deficit.

The planning ministry was of the view that the improvement in current account was mainly driven by a sharp decline in imports. The merchandise trade deficit contracted by around $10 billion as imports fell more sharply than exports.

Inflation

The ministry said that with falling global inflation, domestic inflation was expected to gradually moderate next year but “would remain in high double digits owing to risks of supply-side constraints and spillover of recent currency depreciation episodes”. The inflation target is proposed at 21% compared to the current inflation of 36.4%.

The draft paper stated that the main reasons for high inflation were supply chain disruptions caused by catastrophic floods, higher input prices, restraint on imports caused by balance of payments adjustment, and second-round impact of massive currency depreciation.

Gas, electricity, and fuel prices were increased through the reversal of unsustainable fuel and electricity subsidies as part of the IMF deal, which also added to inflationary pressures directly and through second-round effects, according to the planning ministry.

Higher transportation costs added to inflation as petrol prices were increased due to a significant rise in the petrol base price with the re-introduction of petroleum levy.

Another contributory factor was the rise in the cost of working capital as a result of continuous increase in interest rates.

Sector growth

For the next fiscal year, the planning ministry is proposing to set the agriculture sector growth target at 3.5% but it too will be contingent upon expected favourable weather conditions and ample availability of water, certified seeds, fertilisers, pesticides and credit facilities at affordable costs for the revival of crops.

The industrial sector is expected to recover in 2023-24 and is targeted to grow by 3.4% compared to a contraction of 2.94% during this fiscal year.

The large-scale manufacturing sector is projected to grow by 3.2% compared to 8% contraction in this fiscal year.

However, the industrial sector still faces challenges of high interest rates and exchange rate uncertainties, according to the planning ministry. It feared that construction in the housing sector and infrastructure projects may be affected by higher prices of construction material.

The services sector is expected to accelerate its growth to 3.6% compared with a nominal growth of 0.86% in the outgoing fiscal year.

The ministry stated that in the outgoing fiscal year, vulnerabilities inherited from the previous fiscal year continued to pose a serious threat and the government had to take the painful decision of restricting imports to prevent the haemorrhage of foreign exchange reserves.

Published in The Express Tribune, June 1^st, 2023.

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