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ISLAMABAD: The International Monetary Fund (IMF) has projected real GDP growth of Pakistan at 4 percent for fiscal year 2022, adding that inflation is expected to pick up this year before gradually slowing down.

The Fund in its Staff Report prepared for the Executive Board’s consideration on February 2, 2022 projected that the real GDP growth is projected at 4 percent in fiscal year 2022 — consistent with the forecasted course of the pandemic and vaccinations, global recovery, and commodity prices in the WEO baseline — as confidence and investment take hold, and all COVID-related restrictions have been lifted. Assuming sustained policy and reform implementation, growth is expected to reach its medium term potential of 5 percent.

Average CPI inflation is expected to temporarily increase in the coming months and average 9.4 percent in fiscal year 2022 due to the recent terms of trade shock, continued energy price adjustments, and GST reforms. It is expected to be within the SBP’s 9-11 percent inflation range forecast in the next 12 months before slowing to 6.5 percent over the medium term.

Monetary policy should remain data-driven on a forward-looking basis to anchor inflation within the SBP’s objective of 5–7 percent over the medium term.

The current account deficit is forecast to widen to 4 percent of GDP in fiscal year 2022, driven by strong import growth, fuelled by strong domestic demand, higher commodity prices, and slightly receding remittances.

Under the WEO baseline, moderating commodity prices, export growth and stronger policies will help the current account deficit to converge toward 2.5 percent of GDP over the medium term.

In this regard, continued commitment to a market-determined exchange rate and prudent macroeconomic policy mix will help ease external pressures. It would also help, together with the IMF’s recent SDR allocation and tighter monetary policy stance, strengthen the reserve cover to some 2.8 months of imports by the end of the forecast horizon, up from less than 2 months of imports at the onset of the program

The staff report also pointed out that the approved fiscal year 2022 budget marked a departure from EFF objectives and contributed to rapidly increasing macroeconomic vulnerabilities. It delivered a significant fiscal relaxation through large spending increases and the unwinding of several EFF tax revenue commitments, notwithstanding the past revenue underperformance.

Approved in June, the budget was on track to deliver an adjusted primary deficit of 2 percent of GDP, representing a fiscal loosening of 1.4 percent of GDP compared to the fiscal year 2021 outturn.

On the expenditure side, it allowed for large increases in public wages and allowances, a doubling of subsidies, and an increase in investment of over 50 percent.

On the revenue side, it expected unrealistically strong tax revenue growth (from marked improvements in tax administration and strong domestic demand, notably imports) and high non-tax revenue receipts, thus introducing significant risks of fiscal slippages. In addition, the budget delayed key reforms and reversed some key policies, damaging revenue prospects.

Copyright Business Recorder, 2022

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