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LAHORE: The Lahore School of Economics Modeling Lab’s macro model for the Pakistan economy estimates that GDP growth over the FY 2022 has been 4.05 percent. The Covid-19 pandemic, intermittent lockdowns and openings and hysteresis, have given way to growth.

The Lahore School’s estimate is comparable to GoP’s estimate for FY 2022, of 5.79 percent and agreed with the IMF’s estimate of 4 percent. With the Covid-19 pandemic and shutdowns in FY 2021, the GoP had two policy objectives; to generate growth and to curb inflation raging at 12 percent to 14 percent. The policy instruments are the interest rate and exchange rate. Each has a tradeoff.

As inflation has continued to trend upwards over FY 2022, from 8 percent to 14 percent, the GoP had to raise the interest rate significantly, from 7 percent to 13.75 percent which has brought the real interest rate effectively to zero, equaling the inflation rate but to the detriment of investment.

The second tradeoff is for the policy instrument of the exchange rate. The GoP’s policy choice here has been more fraught. It has continued to free the exchange rate, allowing it to depreciate from Rs 157 to the USD in June 2021, to Rs 201 by June 2022. This had the punitive outcome of leaving inflation stubbornly high, and trending higher.

This FY 2022 year has also seen a significant slump in the current account balance, with 10 successive months of observed deficits, ranging between $ 0.55 billion and $ 2.53 billion which lowers the Lahore School’s model’s estimate of GDP growth for FY 2022, compared to GOP’s higher estimate.

The GoP’s EFF agreement with the IMF entailed a reduction in this deficit. Hence for FY 2022 GoP had agreed to lower this deficit to 5.8 percent from 7 percent in FY 2021.

Over FY 2022, the Lahore School model estimates that inflation has trended even higher, to 15.9 percent. This has been contributed to most significantly by rising commodity prices for imported fuel and intermediate goods by near 60 percent followed by the contribution of the depreciation of the exchange rate by 26 percent.

The Lahore School model estimate for inflation for FY 2022 at 15.8 percent is significantly higher than GoP’s estimate of the CPI at 11 percent, as their estimate lies between GoP’s estimate of inflation for the last observed values for April 2022, of a CPI of 13.4 percent, and of a food inflation rate of 17 percent.

Copyright Business Recorder, 2022

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