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 It contains a revised set of macroeconomic projections for 2023-24 in relation to the projections originally made for the year in July 2024 at the time of commencement of the Stand-by Facility.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 percent in 2023-24, as compared to 2.5 percent 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 percent.

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 202324, from 13.6 percent of the GDP in 2022-23 to 14.6 percent of the GDP. Now the expectation is that it will remain unchanged at 13.6 percent of the GDP.

The fall in the projected level by 1 percent 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 percent 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 percent. Now the projected magnitude has been brought down to 24 percent.

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

There are three reasons why the rate of inflation could be significantly higher than 17.4 percent 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 percent 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 percent to 20.2 percent 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 percent of the GDP.

However, there are some risks associated with achieving the primary surplus of 0.4 percent 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.