Pakistan's economy faced a significant setback in the financial year ending on June 30, 2023, with its real GDP growth plummeting to a mere 0.3%. This dismal performance marked the third lowest growth rate in Pakistan's history, revealing the depth of the challenges the country encountered. The economic woes of FY23 were exacerbated by a combination of structural weaknesses, both domestic and global shocks and a deliberate slowdown in domestic demand, all of which cast a shadow on the post-pandemic recovery.

Domestically, contractionary policies and administrative measures were put in place to combat rising inflation. These measures, coupled with the stress on the external account, widespread rains and floods, supply chain disruptions, and political uncertainty, weighed heavily on economic activities within the country. The vulnerabilities in Pakistan's economic structure were evident in the composition of real GDP. Over 90% of GDP was attributed to consumption, while investment fell to 13.6% of GDP in FY23, after hovering around 15% for the preceding four years. Similarly, exports remained stagnant at around 10% of GDP over the last five years. Notably, real investment experienced a drastic decline of 15.4% in FY23, reflecting deteriorating business confidence due to increased domestic uncertainties and persistent bottlenecks.

Talking to WealthPK, Shahid Javed, a senior economist at the State Bank of Pakistan, said this composition of GDP, where consumption plays a dominant role, often results in fluctuations in economic growth. “Low investment, a result of limited domestic savings, and a lack of capacity to meet domestic demand are associated with an expanding current account deficit. In response to this situation, contractionary policies aimed at slowing domestic demand were implemented, causing a deceleration in real consumption growth to 0.7% in FY23 from 5.9% in FY22,” he explained.

Javed said that the brunt of these contractionary policies and their impact on slower consumption growth in FY23 was mainly felt by the industrial and services sectors. “The deceleration in real GDP growth was primarily driven by a contraction in the industry, led by the large-scale manufacturing (LSM) and construction sectors. This decline was due not only to the policy-induced slowdown in demand but also to the reduced availability of raw materials resulting from floods and import restrictions, which negatively affected industrial activities.”

“Many firms were forced to shut down temporarily, mainly due to supply chain disruptions. Furthermore, the political and economic uncertainty, particularly surrounding the IMF programme, weighed heavily on business sentiments. As Pakistan grapples with the challenges that led to this alarming economic slowdown, there is a pressing need for structural reforms and policies that can reinvigorate economic growth and stability,” the SBP economist stressed.

Credit: Independent News Pakistan (INP)