SBP sees sustained growth in H2-FY24

May 14, 2024 (MLN): Pakistan’s modest economic recovery in H1-FY24 is expected to continue in the second half of FY24, which is also reflected by improvement in business confidence about expected economic conditions since November 2023, the State Bank of Pakistan (SBP) noted in its half year report on Pakistan's Economy 2023-2024.

To note, Pakistan's macroeconomic conditions somewhat improved during H1-FY24. Real economic activities moderately recovered against the contraction in last year, while Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) helped reduce stress on external account.

The real GDP grew by 1.7% during H1-FY24 compared to 1.6% in H1- FY23, and a contraction of 1.9% in H2-FY23.

The central bank further noted that going forward, inflationary pressures, albeit elevated, are expected to moderate.

Moreover, the external account outlook has improved. The current account deficit is expected to be lower than the earlier projection, whereas disbursement of last tranche of $1.1 billion under the IMF’s SBA would help maintain external buffers, it noted.

High-frequency indicators suggest a moderate recovery in economic activity from November 2023 onwards.

In addition to rebound in cotton and rice production, the prospects for good wheat harvest during FY24 also increased.

This is mainly on the back of higher area under cultivation, better input availability, and favorable weather conditions.

The continued easing of FX constraints ameliorated the supply chain situation and availability of industrial raw materials that is supporting some of the large industries. In view of these developments, the SBP projects real GDP growth in the range of 2–3% for FY24.

Going forward, further adjustments in energy prices and fiscal consolidation, warranted for slowing the pace of debt accumulation, may continue to weigh on economic activities.

In this context, achieving higher growth trajectory over the medium to long-run depends on reforms addressing lingering structural issues.

Continued tight monetary policy stance and fiscal consolidation are expected to keep domestic demand in check.

Moreover, the anticipated increase in wheat production may help maintain downward trajectory in food inflation by improving supply and discouraging any speculative sentiments.

On the other hand, any significant increase in administered energy prices may offset the impact of these positive developments on inflation outlook.

Incorporating these factors, the SBP has revised its inflation projection range to 23–25% for FY24.

However, escalating geopolitical tensions, unfavorable weather conditions, adverse movements in global oil prices, and subsequent external account pressures are some important upside risks to this outlook.

On external account, slightly improved global outlook and domestic growth prospects are anticipated to boost foreign exchange earnings from exports and remittances.

While resilient global demand may have a positive impact on Pakistan’s exports, moderating global commodity prices may significantly suppress import prices, leading to an overall contraction in import bill and, hence improvement in trade balance.

Taking these factors into account, the SBP projects the current account deficit in the range of 0.5–1.5% of GDP for FY24.

This outlook remains susceptible to unfavorable movement in international commodity prices and continued tight global financial conditions.

Under these circumstances, it is imperative to boost exports through reforms aimed at enhancing productivity and attracting FDI in export-oriented sectors to keep the CAD at sustainable level without constraining domestic economic activities.

Copyright Mettis Link News