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Pakistan Economy_Economy vitals—situation far from comfortable, (AKD Daily, Dec 23, 2022)

AKD Daily

Pakistan Economy: Economy vitals—situation far from comfortable,

• As per “The state of economy report—2021-22” released by the central bank recently, the country’s economic growth is expected to moderate considerably in FY23. Having delivered a headline growth approaching 6% in FY22, the country is expected to even miss the revised growth target of         3% - 4% this time round.
• In addition, the government has targeted to reduce the fiscal deficit to 4.9% of GDP in FY23 from 7.9% in FY22, an outcome that would be achieved through both revenue and expenditure measures. Widening of tax base through elimination of exemptions, increase in tax rates and reinstatement of fuel taxes are expected to boost tax receipts, while, the non-tax revenues will also recover with the re-imposition of PDL.    
• Given that there will likely be slippages on the expenditure front with respect to rehabilitation efforts, IMF is insisting on higher collection in order to keep the fiscal and primary deficits within permissible levels. We expect fiscal deficit to clock ~6.5% of GDP, despite higher tax collection, owing to i) higher debt servicing and ii) potential slippages during 2HFY23 owing to election and flood relief related spending.
• Current account deficit situation is expected to improve beyond our original estimates of ~3% of GDP in FY23 due to various demand suppression measures implemented by the government. Likewise, commodity prices have also softened which will reduce the pressure on CAD even further. However, the loss to agriculture produce, induced by the recent floods, is likely to step up import of agriculture commodities, especially cotton.
• Pakistan’s economy is in an extremely fragile state today with FX reserves standing close to US$6bn, barely enough to provide import cover of 1.16 months. The external debt stands at $127 billion, equivalent to 40% of GDP. Pakistan faces significant challenges on the debt rollover. To this end, during 5MFY23, the gross inflow (including US$1.2bn from IMF) has been only US$4.9bn, while the amortization payments have been US$4.1bn. The market has been jittery and we expect the volatility to continue throughout CY23.

AKD Research