By Muhammad Muteeullah
ISLAMABAD: The upcoming fiscal (FY23) – marked by political risk, lower growth, higher inflation, and wider deficits – would be a difficult one for Pakistan, warns JP Morgan.
In a recently published report, the global financial services firm said that this year’s severe floods had significant implications for the country’s already ailing economy.
JP Morgan projections for fiscal year 2023
Declining Growth Rate
The growth is expected to fall to 1.3% in FY23, with further downside risk amid the widespread damage to the agricultural sector (24% of GDP; 37% of labor force).
Surging Inflation
Inflation is also revised up to 27% in FY23 due to food shortages, in addition to other pressures such as administrative price hikes (e.g., fuel excise tax, electricity tariff), the lagged impact of FX depreciation, and broad-based second-round effects.
Current Account Deficit (CAD)
The current account deficit is expected to hover at around 4-4.5% of GDP in FY23 amid increased food imports, with upside bias if the government intends to front-load reconstruction efforts.
External financing in control but still present
Gross Financing Requirement (GFR) analysis by JP Morgan showed a financing gap of about US$2 billion in FY23, which can be absorbed by Pakistan’s reserves (circa. US$ 9 billion) but this assumes the rollover of existing debt and the timely disbursements of new funds from bilateral and multilateral lenders.
SBP to stand pat through FY23
Despite the surging inflation, JP Morgan projected that the State Bank of Pakistan (SBP) would stick to its given policy rate of 15%. However, there is a chance of resumption of rate hikes in case of renewed pressure on the currency.
Elevated Political Risk
The attempted assassination of former prime minister and Pakistan Tehreek-e-Insaf chief Imran Khan has further aggravated the already tense political atmosphere of Pakistan. The political risk has elevated with general elections less than a year away and could have a severe impact on the economy.
