An Unbiased Analytical Review of Pakistan Economy

The macroeconomic status of Pakistan's economy is precarious and challenging, as the country faces multiple shocks and pressures from both domestic and external sources. According to the latest available data and forecasts, Pakistan's economy is expected to experience a sharp slowdown in growth, a surge in inflation, a widening of fiscal and current account deficits, a depletion of foreign exchange reserves, and a rise in public debt. Here is a brief overview of the main indicators and projections for Pakistan's economy:

- GDP growth: Pakistan's economy is estimated to have grown by 6.0% in FY2022, driven by strong performance in the agriculture, industry, and services sectors⁶. However, this growth momentum is forecast to be disrupted by devastating floods that hit the country in July 2023, causing widespread damage to crops, infrastructure, and livelihoods⁸. Moreover, the government has implemented policy tightening measures, such as raising interest rates, cutting subsidies, and imposing import controls, to address the sizable fiscal and external imbalances that have accumulated over the past years⁷. These measures are expected to dampen domestic demand and investment, as well as constrain economic activity. As a result, Pakistan's economy is projected to slow down to 0.5% in FY2023⁷⁸, well below its potential growth rate.

- Inflation: Pakistan's inflation rate has soared to 31.4% in June 2023⁷, the highest level since 1991. The main drivers of inflation are the rising world commodity prices, especially for oil and food items, the depreciation of the Pakistani rupee against the US dollar, the removal of subsidies on electricity and gas, and the expansionary fiscal and monetary policies pursued in the previous years⁶⁷. The high inflation rate has eroded the purchasing power of consumers, especially the poor and vulnerable segments of the population, and has increased the cost of production for businesses. The government and the central bank have taken steps to curb inflation by tightening monetary policy, reducing fiscal deficit, and stabilizing the exchange rate⁷. However, these measures will take time to have an effect on inflation expectations and price dynamics. Therefore, inflation is expected to remain high at around 30% in FY2024⁷.

- Fiscal deficit: Pakistan's fiscal deficit widened to 7.9% of GDP in FY2022⁷, exceeding the target of 6.5% set by the government. The main reasons for the fiscal slippage were the lower-than-expected tax revenues due to weak economic activity and tax administration issues, the higher-than-budgeted expenditures due to COVID-19 relief measures and debt servicing costs, and the loss of grants from some development partners due to political tensions⁶⁷. The large fiscal deficit has increased the public debt burden, which reached 89% of GDP in FY2022⁷, well above the statutory limit of 60%. The government has committed to reduce the fiscal deficit to 6.5% of GDP in FY2023 by implementing revenue-enhancing measures, such as broadening the tax base, improving tax compliance, rationalizing tax exemptions and concessions, and introducing new taxes on luxury goods and services⁷. The government has also planned to reduce expenditures by phasing out subsidies, containing current spending, prioritizing development spending, and restructuring loss-making public enterprises⁷. However, these fiscal consolidation efforts will face significant implementation challenges due to political resistance, social unrest, institutional capacity constraints, and natural disasters⁶⁷.

- Current account deficit: Pakistan's current account deficit narrowed to 0.7% of GDP in FY2022 from 1.9% in FY2021⁶⁷, mainly due to an increase in exports and remittances. Pakistan's exports grew by 18.4% in FY2022, supported by strong demand from key markets such as the US, China, UK, Germany, UAE, and Netherlands. The main export items were textiles (which accounted for 45% of total exports), food products (13%), chemicals and pharmaceuticals (8%), leather goods (3%), sports goods (2%), and petroleum products (2%). Pakistan's remittances also increased by 17.4% in FY2022, reaching a record high of $33.5 billion. The main sources of remittances were Saudi Arabia (28%), UAE (21%), UK (10%), US (9%), Kuwait (5%), Malaysia (2%), and other countries (25%). However, these positive developments were partly offset by an increase in imports by 26.9% in FY2022, driven by higher demand for petroleum products (which accounted for 29% of total imports), agricultural and other chemicals (14%), machinery (7%), food products (13%), textile products (8%), metal products (6%), and transport equipment (2%). Moreover, the current account balance is expected to deteriorate in FY2023 to a deficit of 2.3% of GDP⁷, due to the easing of import restrictions, the recovery of domestic demand, the higher oil prices, and the lower remittances growth⁶⁷.

- Foreign exchange reserves: Pakistan's foreign exchange reserves declined to $13.2 billion in June 2023, equivalent to 2.1 months of imports, from $16.1 billion in June 2022. The main factors behind the reserve depletion were the large current account deficit, the repayment of external debt obligations, and the intervention in the foreign exchange market to support the rupee⁶⁷. The low level of reserves has increased the vulnerability of Pakistan's economy to external shocks and has constrained its ability to finance its import needs and service its external debt. The government has sought external financing from various sources, such as the International Monetary Fund (IMF), which approved a $6 billion Stand-By Arrangement (SBA) for Pakistan in July 2023¹¹, the World Bank, the Asian Development Bank, the Islamic Development Bank, China, Saudi Arabia, UAE, and other bilateral and multilateral partners⁶⁷. These inflows have helped to avert a balance of payments crisis and to rebuild some reserve buffers. However, Pakistan's external financing needs remain high and its access to international capital markets remains limited due to its low credit ratings and high borrowing costs⁶⁷.

The future status of Pakistan's economy will depend on the successful implementation of the structural reforms agreed with the IMF and other development partners, as well as on the resolution of the political and security challenges that the country faces. The reforms aim to restore macroeconomic stability, strengthen fiscal and external positions, enhance growth potential, improve social protection, and foster transparency and accountability¹¹. However, these reforms will entail significant economic and social costs in the short term, such as lower growth, higher inflation, reduced subsidies, increased taxes, and lower public spending⁶⁷. Therefore, it is essential that the government maintains its reform commitment and builds broad-based consensus and ownership among all stakeholders, including political parties, civil society, business community, media, and general public⁶⁷. Moreover, it is crucial that the government addresses the security threats posed by terrorism, extremism, sectarian violence, and regional conflicts that undermine investor confidence and social cohesion⁶⁷. If these challenges are overcome, Pakistan's economy has the potential to achieve higher and more inclusive growth in the medium to long term, based on its rich natural resources, large population, strategic location, and diversified export base⁶⁷.

Sources: 

(1) Pakistan: Economy | Asian Development Bank. https://www.adb.org/where-we-work/pakistan/economy.

(2) Pakistan Economy to Slow in 2023 Amid Strong Climate Headwinds — ADB. https://bing.com/search?q=Pakistan+economy+forecast.

(3) Pakistan Forecast - TRADING ECONOMICS. https://tradingeconomics.com/pakistan/forecast.

(4) IMF forecasts Pakistan’s economy to slump, inflation to rise. https://www.aljazeera.com/economy/2023/4/12/imf-forecasts-pakistans-economy-to-slump-inflation-to-rise.

(5) Pakistan Overview: Development news, research, data | World Bank. https://www.worldbank.org/en/country/pakistan/overview.

(6) Economy of Pakistan - Wikipedia. https://en.wikipedia.org/wiki/Economy_of_Pakistan.

(7) Pakistan country brief | Australian Government Department of Foreign .... https://www.dfat.gov.au/geo/pakistan/pakistan-country-brief.

(8) Pakistan Economic Brief 2022 - KPMG Pakistan. https://kpmg.com/pk/en/home/insights/2022/06/pakistan-economic-brief-2022.html.

(9) Economic Brief 2023 - KPMG Pakistan. https://kpmg.com/pk/en/home/insights/2023/06/economic-brief-2023.html.

(10) Pakistan Economy to Slow in 2023 Amid Strong Climate Headwinds — ADB. https://www.adb.org/news/pakistan-economy-slow-2023-amid-strong-climate-headwinds-adb.

(11) Pakistan to be 20th biggest economy in 2030, 16th in 2050: PwC. https://www.thenews.com.pk/print/185072-Pakistan-to-be-20th-biggest-economy-in-2030-16th-in-2050-PwC.