Stagflation Concerns:
The International Monetary Fund (IMF) has issued a warning regarding the continued presence of stagflation in the country while also revising down the GDP growth projection for the current fiscal year 2023-24. The IMF’s concerns were reported by The News on Monday.
GDP Growth Projection Revised Downward:
In its World Economic Outlook for 2023-24, the IMF has estimated that Pakistan’s GDP growth rate for the current fiscal year will reach 2.5%, a significant drop from the government’s target of 3.5%.
Elevated Unemployment Rate:
In addition to stagflation concerns, the IMF has expressed worries about the unemployment rate. It anticipates that the unemployment rate will remain at 8% in FY2024, compared to 8.5% in FY2023. This is a noticeable increase from the unemployment rate of 6.2% in FY2022. The data from the IMF highlights a concerning trend of rising unemployment in the past two fiscal years.
Previous Year’s GDP Growth Rate and Future Projections:
The IMF’s report indicates that the GDP growth rate turned negative at -0.5% during the previous financial year 2022-23 under the PDM-led regime. However, the government had initially reported a provisional growth rate of 0.29% for the previous fiscal year. The IMF projects that the country’s GDP growth rate may rebound to 5% by FY2028.
Inflation Projections:
While the IMF’s report mentions that the Consumer Price Index (CPI)-based inflation is projected at 23.6% for the current fiscal year, this is higher than the government’s projection of 21.9% for the ongoing financial year.
Impact of Stagflation:
A combination of low growth and high inflation often leads to stagflation, a condition that could exacerbate poverty and unemployment. This scenario raises concerns that vulnerable segments of society may fall into the depths of severe poverty.
Revised Inflation Projections:
The IMF’s World Economic Outlook has revised the CPI-based inflation projection from an earlier estimate of 25.9% by the IMF staff in a report released last July. The current projection stands at 23.6% for the ongoing fiscal year.
Concerns About Current Account Deficit:
One of the most alarming indicators for Pakistan’s economy relates to the persistence of the current account deficit, which is projected to be around -1.8% of GDP for the current financial year 2023-24. This is a significant increase from -0.7% of GDP in the financial year 2022-23.
Global Economic Outlook:
Meanwhile, the IMF has maintained its 2023 global growth forecast, keeping it unchanged from the previous report. However, it has cautioned that the global economy is “limping along” due to persistently high inflation and downgraded outlooks for countries like China and Germany.
The IMF’s Chief Economist, Pierre-Olivier Gourinchas, mentioned that while the global economy continues to recover from various challenges, including the pandemic and geopolitical events like Russia’s invasion of Ukraine, growth remains slow and uneven. The global economy is characterized as “limping along” rather than making robust progress.
Inflation Concerns and Monetary Policy:
Inflation, which had seen a significant drop since the previous year, is expected to remain elevated at 6.9% this year, with a slight increase from the July report. In 2024, it is predicted to be 5.8%, representing a 0.6 percentage point increase. Central banks have implemented substantial interest rate hikes to counter inflation.
The IMF cautioned central banks against prematurely easing monetary tightening measures and reiterated its expectation of a “soft landing” for the global economy, implying a slowdown that avoids a full-blown recession.
Pierre-Olivier Gourinchas stated that while there are encouraging signs regarding inflation, there is still progress to be made before achieving a desirable economic balance.
