As the federal and provincial governments adopt fiscal and monetary tightening policies, the current political uncertainty and the International Monetary Fund (IMF)-led economic stabilisation efforts are likely to slow the country’s growth prospects and keep inflation high next fiscal year (FY2022-23).
This is said to be the key focus of the National Economic Council’s (NEC) meeting later this week, which will approve next year’s macroeconomic framework and development programme. The NEC, which is chaired by the prime minister, is made up of four chief ministers and as many federal ministers. The prime ministers of Azad Jammu and Kashmir and Gilgit-Baltistan also attend sessions of the country’s main economic and development policy-making body.
Despite broad-based growth that exceeded expectations in almost all real sectors of the economy, the Planning Commission questioned the quality of the current fiscal year’s growth, saying it was “mainly propelled by excessive demand-driven consumption.” The economy outperformed the expected aim of 4.8 percent (the target is an old base, so it may not be actually comparable) by a significant margin in the current fiscal year, according to the commission’s documents. Agriculture contributed 4.4 percent, industry 7.2 percent, and services 6.2 percent of the total growth; all three sectors outperformed their respective expectations.
“With the likely resumption of the IMF programme, the economic outlook for the next fiscal year is expected to result in an orderly rebalancing between imperatives of economic growth and addressing external sector vulnerabilities,” the Planning Commission predicted, “particularly in light of the extent of global slowdown and the expected abatement of global inflation in commodity prices and the stability of exchange rate movements.”
The commission predicts a slowdown in economic growth as a result of fiscal adjustment efforts, resolving the worsening trade balance, and reducing political and economic uncertainty. “GDP growth will gradually drop off and is estimated at 5% for 2022-23, on the back of agriculture 3.9 percent, manufacturing 7.1 percent, and services sector 5.1 percent,” it added, adding that investment will be curtailed due to fiscal and current account compression. “Global inflationary pressures will not ease fast, therefore inflation will remain in the double digits.”
A number of factors influence the lower growth rate of 5%. According to the Planning Commission, agriculture’s expected increase of 3.9 percent is largely dependent on the resurgence of cotton and wheat output, consistent availability of water, certified seeds, fertilisers, pesticides, and farm financing facilities.
Furthermore, the elevated industrial performance of the previous two years is likely to stabilise, and the increased production capacity during these years will anchor the economic momentum, but “growth momentum will be slowed owing to fiscal consolidation efforts,” according to the commission. During 2022-23, the broad-based resurgence of large-scale manufacturing (LSM) is expected to keep growing at 7.4%.
“There are downside risks of high costs and low supplies of energy inputs, exchange rate-related uncertainties, and supply shocks related to the Russia-Ukraine war, which have the potential to impact the manufacturing sector,” the commission noted, projecting 7.1 percent growth in the manufacturing sector in 2022-23.
It also predicted that the services sector would slow, with growth of 5.1 percent expected next year, which is still lower than the 5.3 percent annual average growth seen in the five years before to Covid-19. Agriculture and industry are predicted to perform well, complementing the services sector’s targeted expansion.
Due to the stabilisation and uncertain economic climate, investment levels are likely to fall slightly to 14.7 percent of GDP in 2022-23. On a nominal level, fixed investment is predicted to expand by 13%, but as a proportion of GDP, it is expected to fall somewhat from last year, and will remain around 13% of GDP in 2022-23. The National Savings Rate (NSR) is set at 12.5 percent of GDP.
The government will undertake fiscal consolidation, according to the planning commission, and efforts will be made to reduce the budget deficit through a combination of revenue augmentation and expenditure management programmes. “The monetary policy stance will remain vigilant and supportive of demand management policies,” it said, adding that the external sector is expected to improve as a result of import compression measures, while export prospects are expected to be harmed by global demand compression and rising protectionism.
The government’s main economic body is also expected to formally approve next year’s national development programme, which the Annual Plan Coordination Committee (APCC) has recommended at around Rs2.2 trillion, including a lower amount than the current year’s federal Public Sector Development Programme (PSDP) of Rs800 billion. The proposed PSDP was under review at the Prime Minister’s Office until the filing of this report for the inclusion of new development projects to satisfy coalition partners.