The SBP anticipates a significant slowdown in economic growth.

KARACHI Due to the combined effects of the devastation caused by the floods and the government’s efforts to consolidate its finances, the State Bank of Pakistan (SBP) predicted on Friday that economic growth would significantly slow down during the current fiscal year.

According to the central bank’s mid-year report for the fiscal year 2022–2023 (FY23), real GDP growth is anticipated to continue to be far slower than both its own revised prediction of approximately 2% and the previous year’s growth rate of 6%.

The SBP said that “demand management measures and the floods in 2022 have significantly weighed on the growth outlook for FY23.” The predictions given by the international financial institutions nearly precisely match the central bank’s worries about growth.

Pakistan’s economic projection was downgraded by the International Monetary Fund (IMF) last month, which forecast that the economy would only grow by 0.5% this year. The World Bank predicted that the GDP of the nation will increase by 0.4% this year, down from its 2% growth forecast made in October.

The country is now grappling with a severe balance of payments crisis, falling foreign currency reserves, and record-high inflation. The SBP’s economic assessment was published at this time.

The likelihood of default is rising due to Pakistan’s IMF bailout’s lack of progress. The country’s political and economic upheaval may increase as a result of rising tensions after the arrest of Pakistan Tehreek-e-Insaf Chairman Imran Khan, which may make the IMF’s $6.5 billion bailout even less likely.

According to the central bank, consumer price index (CPI) inflation is expected to continue high in FY2023, ranging between 27 and 29%.

“The persistent rise in food and energy inflation is primarily attributed to the deteriorating inflation outlook, while core inflation may continue to edge up as well,” the report added.

“A number of factors, including the second-round effects of recent exchange rate depreciations, fiscal adjustments such as increases in GST, gas and electricity tariffs, and an upward drift in inflation expectations, could be used to explain the near-term risks to inflation outturns.”

It also observed that lower-than-target wheat output in Pakistan and worry over a rise in crude oil prices as a result of China’s economy growing more quickly than anticipated.

The external account pressures persisted despite a significant reduction in the current account deficit, planned debt repayments, and noticeably fewer foreign inflows. As a consequence, foreign currency reserves were severely depleted.

The SBP said that the external account vulnerabilities “are likely to remain at an elevated level in FY23” due to the current internal macroeconomic uncertainties, the effect of the flood, and the rising interest rate environment worldwide.

But by expanding access to bilateral and multilateral finance options, the IMF loan program’s restart would help allay worries about the external sector as a whole.

Inadequate external financing, a low level of foreign exchange reserves, unfavourable global economic conditions, uncertainty surrounding the conclusion of the IMF program’s ninth review, and political unrest during H1-FY23 all contributed to these issues, which were made worse by flash floods and other natural disasters. In particular, output in both large-scale manufacturing (LSM) and agriculture decreased, yet headline inflation increased to a level not seen in more than a decade.

The SBP said that it will keep working to encourage economic development while containing inflation and stabilising the external sector. It did, however, issue a warning that the economic future is still dim and fraught with uncertainties.