Pakistan to witness economic contraction in FY23: IISL report

Facing the consequences of flood devastation, high inflation and policy measures, Pakistan's economy is expected to witness economic contraction this fiscal year, said a brokerage house. "Pakistan is set to witness negative GDP growth, which would be only the third such in the history of the country i.e. in 1952 and 2020," said Ismail Iqbal Securities Limited (IISL) in its report titled 'Pakistan Outlook 2023 No Easy Way Out' released earlier this week.

"We expect GDP growth at negative 1% in FY23 (Govt target 5%), which would be on the back of a broad-based slowdown across all sectors," it said. The report said that the slowdown is a culmination of cataclysmic floods, high inflation, and policy choices i.e. higher interest rates, and import controls. As per the report, industrial growth is expected to come at a negative 4% in FY23, as manufacturing units are shutting down operations amid low demand and lack of raw material availability.

"In FY23, LSM growth is expected to contract by 8% as compared to 12% growth in FY22," it said. Meanwhile, the services sector is also expected to remain muted amid high inflation, lower imports, and fall in agricultural output.

On the agricultural sector, important crops barring maize are expected to witness a decline as floods inundated 8.3 million acres of land. "Cotton and rice have been hit the hardest. Wheat production is also expected to drop due to floods and low DAP application amid higher prices," said the report. On the other hand, despite the major challenges, the brokerage house believes that Pakistan is unlikely to default, given the International Monetary Fund (IMF) programme and other inflows materialise.

"We think Pakistan is less likely to default due to three key factors; a) less reliance on external borrowing b) lower dependency on Eurobonds and c) manageable external financing gap of FY23," said the report.

The brokerage house said Pakistan has lower external debt to GDP of 31% compared to countries which have defaulted (avg external debt to GDP of 59%). "We have estimated FY23 financing gap of $5.3b. We have mainly assumed that Pakistan will remain committed to the IMF programme, all multilateral flows apart from conditional RISE II and PACE loan will materialise, and bilateral deposits will be rolled over," it said.

The report was of the view that only $3.3b loans pertaining to China will be rolled over. "Based on our assumptions, we estimate inflows of $25.4b against the requirement of $30.6b ($23b debt repayment + $7.6b CAD), thus the financing gap comes at $5.3b. "In our view, Pakistan is likely to finance this gap through a $3-billion deposit from Saudi Arabia, $600m from additional Saudi oil facility and $1.45b Chinese swap facility," it said.