Latest IMF projections

The Staff Report of the IMF on the First Review under the Stand-By Arrangement was released on the 19th of January 2024. It contains a revised set of macroeconomic projections for 2023-24 in relation to the projections originally made for the year in July 2024 at the time of commencement of the Stand-by Facility.

A comparison of the two sets of projections reveals some scaling down of the growth prospects for 2023-24, despite the low base effect of negative growth last year, especially in agricultural production due to the floods.

The economy is now expected by the IMF to show a GDP growth rate of 2% in 2023-24, as compared to 2.5% in the earlier projection. Presumably, this reflects the fact that in the first five months of 2023-24 the large-scale manufacturing sector has shown a negative growth. Also, in the first quarter of 2023-24 the PBS has estimated the GDP growth rate as closer to 2%.

The IMF also now expects a downturn of investment in the economy. The original projection in July was that there will be a significant revival of investment in 2023-24, from 13.6% of the GDP in 2022-23 to 14.6% of the GDP. Now the expectation is that it will remain unchanged at 13.6% of the GDP.

The fall in the projected level by 1% of the GDP is expected in the investment by the private sector and the SOEs. The IMF now appears to have realized that in the presence of the extremely high interest rates, there will be greater reluctance of the private sector to invest. In fact, there has been a small and only 1% increase in the total quantum of credit extended to the private sector in the first seven months of 2023-24.

A key magnitude is the projected rate of inflation by the IMF in 2023-24. Initially the average monthly rate of increase in the Consumer Price Index was expected to be 25.9%. Now the projected magnitude has been brought down to 24%.

However, the average rate of inflation in the first seven months has been as high as 28.7%. Bringing this down to an annual average of 24% will require that the average rate of inflation from February to June 2024 to decline sharply to 17.4%. This is highly unlikely.

There are three reasons why the rate of inflation could be significantly higher than 17.4% in coming months. First, the conditions in the Red Sea are putting pressure on international oil prices. Already, the price of Brent crude has gone up to $82 per barrel. The current fortnight has witnessed a significant increase in the local price of HSD oil and motor sprit.

Second, power regulator Nepra has approved a big increase in the electricity tariff, which is to be implemented shortly. There is also the likelihood of another round of increase in gas tariffs. Third, money supply is expanding more rapidly due to high domestic borrowing by the federal government. This will also fuel inflationary pressures.

The IMF expects that the budgetary target of a primary surplus of 0.4% of the GDP will be met in 2023-24. This will be achieved despite increase in the level of expenditure by the federal and provincial governments combined from 19.8% to 20.2% of the GDP, due largely to the higher cost of debt servicing. Tax revenues are expected to be correspondingly higher and to reach 10.6% of the GDP.

However, there are some risks associated with achieving the primary surplus of 0.4% of the GDP. First, the tax base of the rupee value of imports will have to show significantly faster growth than has been the case in the first half of 2023-24.

Second, there is the risk of a flattening out of non-tax revenues following the recent large lumpy transfer of profits by the SBP to the federal government. More such transfers are unlikely in the rest of 2023-24. Third, there will continue to be pressure for higher subsidies to prevent further accumulation of the circular debt.

We turn now to the most critical set of projections by the IMF relating to the external balance of payments position by the end of 2023-24.

The IMF has made significant changes in its projections of the balance of payments. The current account deficit is expected to be somewhat smaller by $0.8 billion and stand at $5.6 billion in 2023-24. This is clearly a reflection of the low current account deficit in the first half of the year of even less than $1 billion.

However, the IMF projections imply a faster growth rate in exports of goods in the second half of the year of over 10%, as compared to 7% in the first half of the year. The truly inexplicable projection is that the growth rate of imports of goods will be as high as 48% from January to June 2024, which is in sharp contrast to a fall of 15% in the first half of the year. This sends the signal that IMF will reiterate the need to remove all physical restrictions on imports and follow a market-determined exchange rate policy.

The big increase anticipated in imports is expected to be partially financed by a return to buoyancy in home remittances. They fell by 7% in the first half of the year. The IMF now expects a handsome growth of 24% in the second half of the year. The basis for this optimism is not clear.

The financial account of the balance of payments is projected to show a significant surplus of $5 billion in the second half of 2023-24. There is expected to be a larger net inflow into the government account of $3.9 billion, as compared to $2.1 billion from July to December 2023. Clearly, the assumption here is that the second review of the IMF will be successfully completed and the remaining loan will be fully disbursed.

The IMF has projected that the foreign exchange reserves of Pakistan will reach $9.1 billion by the end of June 2024. The balance of payments projections by the IMF are based on a 15% depreciation in the value of the rupee during the year.

Overall, the IMF projections are moderately positive. They visualize a process of stabilization of the economy in 2023-24 with improvement in the foreign exchange reserves and increase in the primary surplus in public finances. However, the outcome of the general election has opened up uncertainties about developments on the political front. This could heighten risks also on the economic front and make it more difficult to achieve any improvement in the state of the economy.

Copyright Business Recorder, 2024