Economy likely to gather steam

Report projects 3.3% growth, slowdown in inflation, lower borrowing cost

KARACHI:

The International Monetary Fund (IMF) executive board’s green light for a $3 billion loan programme has ended a prolonged wait for Pakistan’s faltering economy, which is now expected to gather some steam and advance 3.3% in the current fiscal year along with a deceleration in the soaring inflation and a lower borrowing cost.

In a comprehensive report titled “Pakistan Strategy FY2024 – Resurgence of Optimism”, Arif Habib Limited (AHL) has projected 3.3% economic growth, which is slightly lower than the government’s target of 3.5% for fiscal year 2023-24, but is significantly higher than the IMF’s expectation for 2.5% expansion.

The research house anticipated that inflation would recede to 21% in FY24 compared to 29% a year ago while the central bank’s key policy rate would be slashed to 17% in the second half of the year from the record high of 22%.

These developments are expected to provide the much-needed breather to businesses, leading to the bouncing back of economic activities. It forecast that Pakistan’s foreign exchange reserves would improve to $10.2 billion in FY24 compared to the existing $4.6 billion but the rupee would still depreciate to Rs290 against the US dollar by the end of December 2023 compared to the current parity of Rs278/$.

However, the gradual reopening of the economy in an election year will keep the twin fiscal and current account deficits slightly elevated. At the same time, the chances of a mini-budget cannot be ruled out while foreign debt payments will remain higher at $27 billion compared to $24 billion in FY23.

All such happenings across the broader economy are projected to fuel a smart rally at the Pakistan Stock Exchange (PSX) where the benchmark KSE-100 index is likely to rise by a staggering 24% to a new record high above 56,000 points by the end of current fiscal year on June 30, 2024.

The bourse hit the all-time high around 53,000 points in May 2017.

“In our view, political stability and monetary easing are likely to be the biggest triggers for a sustained rally in the (KSE-100) index,” AHL said.

At present, stocks are trading at significantly lower prices, offering a notably higher return amid potential turnaround in the economy. Investors may place bets in sectors like banks, oil and gas exploration, fertiliser, cement and power, it added. “The successful holding of national elections will mark the end of more than a year of political instability. We think a newly voted-in government will be able to make better economic policy decisions including the successful negotiation of a new IMF programme,” the AHL report said.

The research house expected financial markets to rejoice in the new political setup as polls would bring clarity to the political arena. This will help in making bold economic decisions that address the structural issues.

A new IMF package is expected to be negotiated as soon as the current $3 billion short programme ends. Interest rate cuts are also expected in February-March 2024.

It anticipates a boost to domestic demand when the monetary policy shifts, domestic uncertainties diminish, and external account pressures ease. “If these things materialise, we predict the GDP growth for FY24 to reach 3.3%.”

“We expect 2.9% growth in agriculture, 1.7% growth in the industrial sector (where large-scale manufacturing growth is likely to jump 2.9%) and 3.9% growth in services vis-a-vis last year’s 1.5%, -2.9% and 0.9% growth respectively.”

FY24’s Consumer Price Index (CPI) is expected to stay slightly below 21%. “Key risks to the overall inflation are high food and energy prices, impact of budgetary measures and a weaker currency.”

Consequently, it foresees the initiation of monetary policy easing in the latter part of FY24, with a potential reduction of 400 to 500 basis points in the policy rate.

“The rolling back of some fiscal relief measures, additional/ revision in taxation along with the impact of passing on of any shock in global commodity prices are some of the factors that are likely to keep inflation in check.”

During FY23, the fiscal deficit is expected to reach Rs5.9 trillion (7% of gross domestic product – GDP) compared to the budgeted Rs3.8 trillion (4.9% of GDP).

Moreover, while the government expects FY24 fiscal deficit to be around Rs6.6 trillion, “we believe this deficit will be close to Rs7.8 trillion (7.6% of GDP).”

AHL believes that the current expenditure will exceed the budgeted amount by 9%, primarily due to higher mark-up payments (estimates put them at Rs8.5 trillion), resulting from the prevailing high rate scenario and the government’s reliance on domestic borrowing to finance its deficit.

Current account deficit is likely to remain around $4.4 billion in FY24 (1.2% of GDP) with the lifting of import restrictions while exports battle headwinds from the global recession.

Published in The Express Tribune, July 16^th, 2023.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.