ISLAMABAD:
Year 2023 was a roller-coaster period for Pakistan’s economy, marked by significant highs and lows.
One of the highlights was the Pakistan Stock Exchange (PSX) that reached an unprecedented level of 68,131 points on December 11. This milestone represented not only a decade high but also positioned PSX as the top-performing global market with a 55% return for the year.
However, challenges were evident, particularly with the Pakistani rupee plunging to a low of 334 against the US dollar in September before recovering to Rs279 by the end of the year. Additionally, inflation peaked at an all-time high of 38% in May, eventually easing to 29% by year-end.
The year’s first half was fraught with serious economic difficulties, while the latter half showed signs of recovery. Early in the year, fears of an imminent default loomed due to the withholding of a $1.1 billion IMF tranche.
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However, the situation improved when the IMF sanctioned a $3 billion bailout in June. The economy also saw a split in trends, with the initial six months marked by stringent import controls by the State Bank, followed by a relaxation of these restrictions, leading to resurgence in economic activity and growth rate exceeding 3%.
So how would 2024 fare?
Will the economy continue to stabilise and show any significant growth? After such a seesaw performance in 2023, anticipating the trajectory of 2024 is a challenging task.
The initial litmus test is set for early February and whether the elections can bring any stability. The second big factor would be whether the incoming government can sustain the economic reform momentum initiated by the caretaker government. The third key factor will be the international economic scenario.
In terms of economic growth, there is some hope that 2024 will be much better than 2023. While multilateral agencies project the growth rate to remain below 3%, with the IMF estimating it at 2.5%, and the World Bank and ADB at 1.7% and 1.9% respectively, there are indications that the actual growth may surpass these projections.
Government estimates for agriculture, one of the three main components of gross domestic product (GDP), show an optimistic 3.5% growth, meeting the targets for cotton, rice, wheat, and sugar.
Similarly, it is hoped that the manufacturing sector, which was in contraction for most of 2023, would make a turnaround. This optimism has been there since the State Bank eased restrictions on imports.
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On average, 75% share of imported goods comprises capital goods and raw material. The easing of import restrictions would greatly help the industrial sector in meeting its requirements.
Another boost could come from the expected reduction in the benchmark policy rate by six to seven percentage points over the next few months as inflation is expected to come down substantially. The secondary market has already come down by 2-3%.
As far as reforms are concerned, the caretaker government has put in motion several much-needed measures. These include broadening the tax base, with tax filers reaching an all-time high of 5.36 million in December.
Additionally, it has made efforts to improve the quality of public expenditure by restricting energy and other subsidies and pushing for privatisation of loss-making state-owned enterprises. The energy sector, especially the gas sector, has seen several significant reforms.
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Of course, a lot would also depend on the international factors. The petroleum group constitutes nearly 30% of total imports, and fluctuations in crude oil prices significantly impact both imports and domestic inflation.
While crude oil prices stood at around $120 per barrel in June 2022, they have since declined to as low as $71 per barrel. Should they remain at the current level or decrease further, it would alleviate the strain on the current account deficit.
Another pivotal factor is how the IMF responds to Pakistan’s expected request for the next long-term loan when the current standby agreement concludes in April 2024.
If the incoming political government hesitates, mirroring the indecision of the two preceding administrations on reaching an agreement with the IMF, the accrued gains may reverse. The country’s response to these challenges and opportunities will be pivotal in determining its economic health in 2024.
The writer is a senior fellow at PIDE and has previously served as Pakistan’s ambassador to WTO and FAO’s representative to the United Nations at Geneva
Published in The Express Tribune, January 8th, 2024.
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