major macro economic indicators
|2020||2021||2022 (e)||2023 (f)|
|GDP growth (%)*||-0.9||5.7||6.0||0.5|
|Inflation (yearly average, %)*||10.7||8.9||12.2||19.9|
|Budget balance (% GDP)*||-7.0||-6.1||-7.9||-6.2|
|Current account balance (% GDP)*||-1.5||-1.5||-4.6||-1.5|
|Public debt (% GDP)*||87.6||71.8||72.4||70.0|
(e): Estimate (f): Forecast *Fiscal year 2023: 1st July 2022- 30th June 2023
- Large domestic market benefiting from remittance inflows
- Large and inexpensive labour force
- Development of economic corridors with China and Central Asia, door to the Indian Ocean
- Mineral potential
- Tension in neighbouring region, political fragility and domestic insecurity
- Large informal sector and low tax revenues
- Large and inefficient SOE sector
- Inadequate education (40% illiteracy rate), health, infrastructure and agriculture
- Delayed development of Balochistan, favouring separatism, and rural areas, conducive to the development of radical Islamism
- Energy dependency, deficient electricity production
- Weak manufacturing (13% of GDP) and export base
Sharp economic slowdown amid restrictive policies and historically high inflation
After expanding strongly in the two preceding fiscal years, Pakistan’s GDP growth is projected to slow in the fiscal year 2023 (FY23, ending 30 June 2023), as efforts to stabilise the economy through tackling fiscal and external imbalances will restrict economic activity. Pakistan’s economy relies heavily on private consumption (over 80% of GDP), which is predominantly sustained by rapid population growth and personal remittances (8.1% of GDP). In 2023, however, this main growth driver will be affected by the loss of income of rural populations (63% of total population) following floods that devastated the agricultural sector (20% of GDP) and by rising inflation, which has been persistently high for several decades already. Consumer prices rose rapidly in 2022 on back of the IMF’s demands to stabilise the economy. These included the reduction of the subsidy programme, which caused food and fuel prices to rise, and the removal of a cap on the exchange rate of the Pakistani rupee in January 2023, which caused the currency to depreciate rapidly. Inflationary tension has thus broadened, with core inflation increasing at double-digit rates since June 2022. Price pressures will remain high in 2023, partly due to further energy price hikes imposed by the government in order to raise additional financial revenues, concomitant to the IMF’s call for a complete elimination of energy subsidies. Fixed investment levels have remained low (13% of GDP) and this type of growth is expected to stay slow amid monetary tightening, political risk, stop-and-go economic policies, weak implementation of structural reforms, and an under-developed financial sector.
The country’s export sector contributes modestly to overall growth, accounting for below 10% of GDP, and is overly concentrated in agricultural-based products (mainly cotton and rice), which are primarily sold to regional markets, and apparel and clothing, that are destined for the US and Western Europe. Textile exports contributed 61% to total exports in FY22. After a strong growth phase, the textile sector will face a challenging environment in 2023 amid higher energy costs and weakening global trade demand. Furthermore, monsoonal rains and resultant flooding in the summer of 2022 destroyed over one-third of the total cotton crop, which are likely to exacerbate cotton shortages and affect textile exports. The problem will be compounded by the lack of imported material. Net exports will consequently contribute negatively to economic growth in 2023 and further aggravate the usual external imbalance.
Risks to macroeconomic stability remain high although there are hopes that economic reforms required by the IMF programme and financing will help gather international financial support and promote a sustainable and balanced growth path.
Fiscal and external imbalances, plus risk of sovereign default
The current account deficit widened ten-fold to USD 17.2 billion (4.5% of GDP) in FY22 from USD 1.7 billion (1.5%) in FY21. The goods trade deficit ballooned (to 10.5% of GDP) as imports surged on back of strong domestic demand with spiking global energy and commodity prices driving most of that trend. However, sustained strong remittance inflows (8.1% of GDP) from the Middle East, the US and the UK softened the impact of the wider trade deficit on the current account balance. The increase in the current account deficit was financed by a drawdown in foreign reserves, which fell to USD 2.9 billion as at 3 February, 2023, which was just enough to cover three weeks of imports. The expected reduction in the current account deficit in FY23 caused by low foreign exchange availability and import compression, will not resolve the country’s external solvency issue given the weak financial flows to Pakistan. The resumption of the 2019 IMF programme on 29 August 2022 partially alleviated concerns over external financing needs by releasing USD 1.2 billion in funds. The Extended Fund Facility (EFF) programme was also extended from October 2022 to June 2023 and the facility amount was increased by USD 500 million to USD 6.5 billion of which the IMF has so far disbursed only 60%. The completion of the bailout programme with the release of the balance depends on the complete removal of energy subsidies (almost concluded). Additionally, the IMF wants Pakistan to increase its foreign exchange reserves, to be able to cover its external financing needs until June 2023 by securing a pledge from China, Saudi Arabia, Qatar, and the UAE to roll over and increase their deposits with the State bank of Pakistan, and to refinance their loans. Unlocking the IMF’s funds will pave the way for pledges of new multilateral and bilateral financing, in addition to investments. In a separate deal in January 2023, foreign partners committed to providing USD 10 billion in project loans for reconstruction purposes after last year’s devastating floods.
Lower petroleum levies and increased petroleum subsidies pushed the government’s fiscal deficit higher to 7.9% in FY22. Over three-quarters of the fiscal shortfall was financed by domestic borrowing (77.6%), while external financing provided the rest. Since taking office in April 2022, Prime Minister Shehbaz Sharif's administration has reversed the energy subsidy package implemented by his predecessor’s government and implemented a FY23 budget that targets a fiscal consolidation roadmap based on tax increases and austerity measures. For the first time in seven years, the FY23 budget is targeting a primary surplus (i.e. fiscal balance excluding interest, which could absorb 54% of revenues), stemming from projected higher tax revenue. In January 2023, 62% of public debt was domestic. This partly accounts for 90% of the government’s interest burden.
Since September 2021, the State Bank of Pakistan has raised its policy rate by a cumulative 1,275 bp to 20% (as at 9 March 2023) to reduce inflation expectations, slow rupee depreciation, curb domestic demand and contain the current account deficit. The central bank also introduced temporary measures to curtail imports and alleviate downward pressure on the rupee. Risks of further rate hikes could stem from several factors, including renewed strong inflationary tension, rising inflation expectations, poor implementation of fiscal policy and exchange rate depreciation.
A very uncertain political context as the October 2023 legislative elections approach
A key feature of Pakistan’s political landscape is the power imbalance tilted towards unelected state actors, namely the military and the judiciary. This feature has perpetuated political instability and cast uncertainty over each term of elected civilian governments. No elected prime minister has ever completed their given five-year term in office, although in April 2022 Imran Khan was the first Prime Minister to be removed through a parliamentary process (vote of non-confidence) instead of a military coup or judiciary intervention. Political instability will persist in 2023 and is being exacerbated by the threat of terrorist actions perpetrated by the Pakistani Taliban since 2007 as the opposition uses national security and economic hardships to topple the government. As such, former PM Khan and his party, the Pakistan Tehreek-e-Insaf (PTI), have taken the lead in a popular opposition movement that have seen protest rallies against the coalition government led by Shehbaz Sharif and his Pakistan Muslim League party. In March 2023, during a court appearance on an unrelated matter, attempts were made to arrest Imran Khan, who was accused of illegally selling state gifts during his premiership from 2018 to 2022. His seizure by paramilitary forces resulted in violent clashes between his supporters and the police. The National Assembly is set to be dissolved on 13 August 2023, which means that the next general election must be held no later than 12 October 2023.
Externally, China will remain Pakistan's largest economic partner thanks to the China-Pakistan Economic Corridor (CPEC), although the conditions of its financial support will be tightened due to concerns about debt sustainability. Pakistan will also maintain good relations with Saudi Arabia, Qatar and the United Arab Emirates as the country increasingly seeks financial support from these countries to strengthen its foreign exchange position. Pakistan will balance deepening its ties with Russia, which it has not condemned for invading Ukraine, with the need to maintain the goodwill of the United States to ensure ongoing multinational support.
Last updated: September 2023