The Annual Report for 2022-23 on the State of the Economy by the SBP has been released recently. Along with a detailed review of developments on various fronts of the economy during the year, the Report also includes projections of key macroeconomic magnitudes in 2023-24.

Before an analysis is undertaken of the SBP projections for 2023-24, it is useful to see the accuracy of the projections made for 2022-23 in the Annual Report of 2021-22. This report was released in the latter part of 2022 and recognized fully the economic impact of the floods.

Despite this recognition, the GDP growth rate was projected at close to 3 to 4 percent in 2022-23. It actually was near zero. The rate of inflation was projected to be somewhat higher than 20 percent. It was above 29 percent. The inaccuracy in the projections was fully reflected in the following statement in the Annual Report:

‘The country is expected to receive external financing from multilateral and bilateral creditors that will considerably strengthen FX reserves position during FY-23’

However, contrary to this projection, the FX reserves of the SBP declined from dollar 9.8 billion in end-June 2022 to only dollar 4.5 billion in June 23. The latter magnitude was not even adequate to provide import cover for one month.

Therefore, the SBP outlook for 2022-23 was substantially off the mark. As such, the projections for 2023-24 will have to be subjected to a careful analysis to see if the same biases persist.

The most directly relevant projection from the viewpoint of the monetary policy by the SBP is the rate of inflation in the consumer price index. This is expected to range from 20 percent to 22 percent in 2023-24, which is close to the government target of 21 percent. The IMF has projected a significantly higher average rate of inflation in 2023-24 of 25.9 percent, as shown in Table 1.

                 Table 1
Macro-Economic Targets and Projections, FY 24
      by the Government, IMF and SBP
                            Government Target       SBP          IMF
Real GDP (percent)                 3.5           2.0 - 3.0       2.5
CPI (Average (percent)            21.0          20.0 - 22.0     25.9
                          (Billion US dollar)
Remittances                       30.5          25.5 - 26.5     32.8
Exports (fob)                     30.0          28.0 - 29.0     30.8
Imports (fob)                     58.7          50.0 - 52.0     64.7
                           (percent of GDP)
Fiscal Deficit                    -6.5          -7.0 - 8.0      -7.5
Current Account Deficit             -           -0.5 - 1.5      -1.8

The decline in the rate of inflation is anticipated by the SBP on account of the lagged impact of monetary tightening and improvement in the supply situation due to substantially higher agricultural output and full resumption of imports.

However, the first four months of 2023-24 have witnessed little decline in the rate of inflation which has averaged 28.5 percent, almost the same as the average rate in 2022-23. There is the impending full cost-push impact of doubling of the gas and electricity tariffs.

Further, the international price of crude oil is likely to be higher because of the on-going Middle East situation. As such, it would be an unexpected positive development if the inflation rate comes down significantly to 20 percent.

The next set of key projections relating to the external balance of payments is also of direct relevance to the SBP in the performance of its central bank function, especially with regard to management of the exchange rate and the policy rate.

The projections in this regard by the SBP are conservative in nature, especially in comparison with those by the IMF in the Stand-by Facility.

The current account deficit is expected to be in the range of 0.5 percent to 1.5 percent of the GDP in 2023-24. In absolute terms, this is equivalent to a range from dollar 1.8 billion to dollar 5.4 billion. The IMF projection is of dollar 6.5 billion.

The difference between the two projections is primarily in the likely magnitudes of f.o.b. imports and remittances. The IMF has projected an almost 25 percent increase in imports, whereas the SBP expects the growth to be only marginal.

This is indeed surprising, given that imports were severely restricted last year through physical controls and the agreement with the IMF is that there will be no such controls and instead a market-based exchange rate policy will be adopted.

As such, if the SBP is expecting the import level to remain unchanged at close to dollar 52 billion in 2023-24 as in last year, then this implies a process of larger depreciation in the value of the rupee and little or no growth in import demand even if the real GDP increases by 3 percent. Currently, the opposite is happening with the rupee showing a rise in value in relation to the value in end-June 2023.

Turning to remittances, the SBP projects them at close to dollar 26 billion in 2023-24. This actually implies a fall of almost 5 percent in relation to the level last year.

There is an explanation for the drop in remittances in 2022-23, in the form to a diversion of up to dollar 4 billion to the hundi market when there was a big difference between the open market and the inter-bank exchange rate. This difference no longer exists.

Therefore, the expectation by both the government and the IMF is that remittances will show a double-digit growth in 2023-24. This is very different from the SBP projection that remittances will fall this year. This is consistent with the actual trend of almost 20 percent fall in the first four months of 2023-24.

The SBP projection for exports is from dollar 28 to dollar 29 billion. This does not diverge much from the government or the IMF projections. However, the issue now is that with an appreciating rupee and big increases in input costs of gas and electricity will exporters, especially of textiles, be able to compete internationally and sustain the level of exports.

Already, in the first four months of 2023-24 exports have shown no growth. The SBP Annual Report demonstrates a degree of optimism about the GDP growth rate in 2023-24 by expecting it to approach 3 percent. This is only marginally below the Government’s projection of 3.5 percent, while IMF anticipates a growth rate of 2.5 percent.

The SBP’s projection is based on the big increase in output of cotton and rice in relation to the low base due to the floods. Further, withdrawal of physical controls on imported inputs should facilitate domestic production.

Already, the growth rate of the large-scale manufacturing sector turned positive in August 2023 at 2.5 percent, compared to the negative 10 percent in 2023-24. Therefore, the likelihood is high that the economy could achieve a growth rate of 3 percent in 2023-24.

Overall, the SBP projections for 2023-24 are of a varying nature. They are optimistic with regard to the likely rate of inflation and the size of the current account deficit in the balance of payments. They appear to be realistic on the GDP growth rate and the rate of change in exports and remittances. However, they are perhaps on the low side on the level of imports.

Copyright Business Recorder, 2023

Dr Hafiz A Pasha

The writer is Professor Emeritus at BNU and former Federal Minister


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