According to the International Monetary Fund (IMF), rising inflation and tighter global financial conditions would continue to weigh on Pakistan’s economy, putting pressure on the country’s exchange rate and external stability.
The global lender has issued detailed country report on Thursday.
According to the report, “risks to the outlook and program implementation remain high and tilted to the downside given the very complex domestic and external environment.”
Pakistan 🇵🇰 has taken important steps to soften the blow to its economy from the pandemic and the war in Ukraine.
— IMF (@IMFNews) September 2, 2022
“Spillovers from the war in Ukraine through high food and fuel prices, and tighter global financial conditions will continue to weigh on Pakistan’s economy, pressuring the exchange rate and external stability. Policy slippages remain a risk, as evident in FY22, amplified by weak capacity and powerful vested interests, with the timing of elections uncertain given the complex political setting.
“Sociopolitical pressures are expected to remain high and could also weigh on policy and reform implementation, especially given the tenuous political coalition and their slim majority in Parliament,” the IMF’s report stated.
Moreover, higher interest rates, more than expected growth slowdown, pressures on the exchange rate, renewed policy reversals, weaker medium-term growth, contingent liabilities related to state-owned enterprises and climate change were termed as substantial risks by the IMF.
It cautioned that high food and fuel prices could trigger protests and instability, which could, in turn, jeopardize macro financial and external stability and debt sustainability.
Average CPI inflation is expected to surge to 20 percent in FY23 as international commodity prices are passed on to domestic consumers. Core inflation is also projected to remain elevated due to higher energy prices and sizable depreciation.
With tighter monetary and fiscal policies firmly entrenched, inflation is expected to fall significantly in FY24, supported by favorable base effects. “The SBP is expected to reach its 5–7 percent inflation target range gradually with medium-term inflation slowing to 6.5 percent, it stated.
The tightening of monetary conditions through higher policy rates was a necessary step to contain inflation. Going forward, continued tight monetary policy would help to reduce inflation and help address external imbalances.
Meanwhile, the current account deficit would decline to 2.5pc of the GDP in FY23 compared to 4.7pc of GDP in the previous fiscal year, it stated. This would improve the reserve coverage of imports to 2.3 months from 1.7 months currently.