Challenging road ahead: Pakistan's economic growth projected to slow down to 2.1%: report

Marred by political uncertainty and challenging economic indicators, Pakistan’s GDP growth is projected to witness a significant slowdown to 2.1% in the ongoing fiscal year (FY23), EFG Hermes, an Egyptian financial services company, said in a report released on Friday.

“We forecast real GDP growth will slow to 2.1% in FY23, from 6.2% in the previous fiscal year with the potential for a mild recovery in FY24 to 3.1%,” said the company in its report titled ‘Pakistan Economic Note’, a copy of which is available with Business Recorder.

“The growth outlook beyond the current fiscal year is primarily hinged on future political developments, which will dictate the macro path,” it said.

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“Pakistan’s macro outlook remains hostage to political instability that has unfolded since early this year after the impeachment of former prime minister Imran Khan.

“Since then, the political environment has become a deadlock with a cornered ruling coalition facing an increasingly popular opposition, leading to a political stalemate. Tensions between the PTI and the army have also added oil to the fire, leading to further concerns over political stability,” it said.

“We see no resolution to this deadlock in the immediate future as any near-term elections would risk handing power to the more popular PTI,” the report stated.

Moreover, adding to the challenging external economic conditions, recent floods paint an unfavorable economic outlook, the report said.

“While we are reassured it will repay its $1 billion maturing Sukuk in December, its external position remains very fragile with reserves of only $8 billion as of mid-November (equivalent to 1.5 months import cover).

“In that respect, the macro sustainability really hinges on Pakistan’s ability to receive external support from friendly countries,” it said.

The report highlighted that the recent appointment of a new army chief might eventually open room for “such flows to come, in our view, though the outlook will remain uncertain in the near term”.

The report expects the Pakistani rupee (PKR) to remain under pressure despite the recent narrowing of the current account deficit.

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“The drop in remittances is of particular concern, which was likely driven by higher remittance inflows through informal channels that offer better rates. Moreover, the drop in imports remains partially driven by de facto import controls, hence this is not necessarily fully genuine.

“We project the current account deficit to narrow to 2.6% of GDP in FY23 with risks mainly tilted to the downside considering the abovementioned concerns,” it said.

Moreover, supply disruptions on the food side, mainly due to the recent floods, and potential measures to contain the fiscal deficit are likely to keep inflation elevated.

“We project average inflation of 23.5% in FY23,” it said.

Earlier in September, the Asian Development Bank (ADB) forecasted Pakistan’s economic growth to slow down to 3.5% in the ongoing fiscal year amid devastating floods, policy tightening, and critical efforts to tackle sizable fiscal and external imbalances.