Qudsia Bano

Pakistan faced a barrage of tough challenges in FY2023, with persistent structural flaws increasing the effects of supply shocks of unprecedented proportions – both domestically and internationally. The impact of floods, IMF's delayed evaluation of the EFF program, persistent domestic uncertainty, and tightening global financial conditions all contributed to a further decline in the situation in FY23, reports WealthPK. A significant supply shock came in the form of devastating floods that struck Pakistan in the early months of FY23. The resulting disruptions in supply chains not only ignited inflationary pressures and restricted economic activity but also had far-reaching implications for the external and fiscal accounts. Simultaneously, the global economic and financial climate, though showing signs of improvement, still struggles with the elevated global commodity prices, mounting debt servicing obligations, and scarcity of external inflows, which imposed considerable stress on the external accounts. Khaliq Ahmed, Assistant Director at the State Bank of Pakistan (SBP), told WealthPK that Pakistan managed to meet its external debt obligations, but the decline in the foreign exchange reserves, coupled with negative sentiments in the foreign exchange market, led to a substantial devaluation of the Pakistani Rupee (PKR) during FY23.

"To alleviate external pressures, the government and the SBP introduced temporary restrictions on imports during the year. However, the limited availability of inputs exacerbated supply bottlenecks, further slowing economic activity and exports. These factors, in addition to global monetary tightening and lackluster external demand, compounded the pre-existing structural deficiencies that have hindered Pakistan's export growth," he said. These combined factors led to a substantial deterioration in Pakistan's macroeconomic performance during FY23. The real GDP growth plummeted to its third-lowest level since FY22, while average National Consumer Price Index (CPI) inflation soared to a multi-decade high. Although the current account deficit (CAD) narrowed considerably, insufficient foreign inflows kept the external account under consistent pressure, resulting in a decline in the foreign exchange reserves for the second consecutive year. Reflecting the unsustainable fiscal policy stance of recent years, a sharp increase in interest payments, continued high energy subsidies, and lower-than-targeted tax collections, all contributed to fiscal consolidation falling short of the envisaged target during FY23. In response to these mounting macroeconomic challenges, the State Bank of Pakistan (SBP) continued to tighten monetary policy, which commenced in September 2021.

The SBP raised the policy rate by a cumulative 825 basis points (bps) during FY23, building on a 675 bps increase in the previous year. This was accompanied by various administrative measures aimed at slowing the domestic demand and alleviating pressure on the external account. To boost revenue collection, the government also introduced new tax measures in the second half of FY23. Ahmed said persisting inefficiencies in the energy sector were a long-standing issue that could not be ignored. High operational losses, overdue payments, and subsidies are not only a financial burden but also an impediment to economic growth. Addressing these issues through targeted reforms is essential to mitigate any future energy crisis and reduce circular debt, he suggested. Furthermore, Pakistan's fiscal challenges, with increased interest payments, energy subsidies, and lower-than-expected tax collection, reflect a need for comprehensive fiscal consolidation. While the government introduced new tax measures, achieving fiscal stability should be a priority not only to reduce inflationary pressures but also to improve the nation's creditworthiness, according to Ahmed.

Credit: INP-WealthPk