The Asian Development Bank (ADB) on Wednesday warned inflationary pressures will remain elevated in Pakistan during the ongoing fiscal year 2023-24, though it noted that it will ease in the coming months as the “base year effect” takes hold.
“Inflation is expected to ease to 25 percent in FY2024 from 29.2 percent in FY2023, as base-year effects set in, food supply normalizes, and inflation expectations moderate,” read the lender’s Asian Development Outlook report for September 2023. “However, sharp increases in energy tariffs under the economic adjustment program, and the continued weakening of the rupee will keep inflationary pressures elevated,” it warned. It said the central bank would likely raise the policy rate from its current value of 22 percent, adding this should gradually reduce inflation to its medium-term target of 5–7 percent.
In a press release accompanying the report, the ADB stressed that Pakistan’s adherence to an economic adjustment program through April 2024 was critical to restoring macroeconomic stability and the gradual recovery of the country’s growth. The report noted that the country’s gross domestic product (GDP) growth was projected to recover modestly to 1.9% in the ongoing fiscal year, against the 0.3% recorded in the past year. However, it added, significant downside risks to the outlook remain, including from global price shocks and slower global growth.
“Pakistan’s economic prospects are closely tied to the steadfast and consistent implementation of policy reforms to stabilize the economy and rebuild fiscal and external buffers,” said ADB Country Director for Pakistan Yong Ye. “Greater fiscal discipline, a market-determined exchange rate, and speedier progress on reforms in the energy sector and state-owned enterprises are key to reviving economic growth and protecting social and development spending,” he added.
In its revised projections for Pakistan, the report assumed a modest rebound in demand in the ongoing fiscal year, with private consumption and private investment growing by about 3% and 5%, respectively. Fiscal and monetary tightening would reduce demand, as would inflation staying in the double digits, it said. It further said that the FY24 budget had targeted a primary surplus of 0.4% of GDP and an overall deficit of 7.5% of GDP, gradually declining over the medium term. It said the current account deficit was projected to increase to about 1.5% of GDP in FY24.
The report noted that timely disbursement from multilateral and bilateral partners would remain crucial for accumulation of foreign reserves, exchange rate stability, and improved market sentiment.
The lender’s report acknowledged that last year’s devastating floods, global price shocks, and political instability had impacted Pakistan’s economy. These factors, it said, had all weakened growth and led to rampant inflation. It said the ADB expected the implementation of the economic adjustment program and a smooth general election to boost confidence. Similarly, it said, easing import controls was likely to support investment. Favorable weather conditions and the government’s relief package of free seeds, subsidized credit, and fertilizers are expected to support a recovery in agriculture, it added. This, in turn, would help the industry, which would also benefit from the increased availability of critical imports.