Think-tank LSE cuts GDP forecast on catastrophic flood

ISLAMABAD: Pakistan’s gross domestic product (GDP) may decline to 2.38 percent in the current fiscal year 2022-23, compared to 6 percent achieved in the last financial year, tracking losses by unprecedented floods across the country, a report stated on Wednesday.

The size of the economy in dollar terms might go up from $347.9 billion in FY2021-22 to $355.9 billion in FY2022-23, the report on Pakistan’s State of Economy from The Lahore School of Economics said.

The flood damage to lives, livelihoods and incomes, over just the first quarter (Q1) of the fiscal year, from July to September 2022, have taken their devastating toll, it added.

The research claimed that the projection of GDP growth was comparable to the The International Monetary Fund (IMF) estimate for the country, made in October 2022, of GDP growth of 2 percent for FY2023.

The model estimated a supply shock, positive or negative, which then feeds into a demand shock to give a final change in GDP for FY2022. It began estimation of the supply shock, by assuming an impact of the floods as observed over Q1, July to September 2022. “If the impact is observed to persist into Q2, October to December 2022, we will revise our current estimate based on just Q1, to Q1 plus Q2.”

It added a further caveat that the estimation of the supply shock delivered by the floods was based only on income loss. “It is does not add loss in capital stock.”

The obvious loss in capital stock due to the floods is in rural housing and infrastructure. The addition of loss in capital stock, can be made theoretically to the loss in income, through reduced investment and consumption, to replace lost housing, according to the report.

The model ran the additional loss of capital stock and rendered GDP growth for FY2023 negative. However, the replacement of housing could only be observed in Q2 to Q4 of FY 2023, so would only be incorporated into revised runs of the model for Q2 to Q4 of FY2023, it added.

“With these caveats, we estimate the total impact of the floods on agriculture and non agriculture, in Q1 of FY2023, at $11.7 billion.”

The government’s emergency economic policy over FY2023 faced an enormous output gap minimally estimated here $12 billion, the report stated. The forex reserves have dwindled to $7 billion. With the extension of the IMF’s Extended Fund Facility to calendar year 2023, covering virtually all of FY2023, its fiscal stance was extremely limited by the terms of the agreement with the IMF, it added.

It stated that the monetary policy was primarily occupied with controlling inflation raging at 23 percent per annum, largely using the interest rate peaking at 15 percent per annum.

“However, we have argued in the last report on the State of the Economy FY2022 that at least a quarter of this inflation rate is being contributed to by the massive depreciation of the exchange.”

The research further showed that depreciation of the exchange rate set in place depreciationary expectations, leading increase capital outflows, which the country’s weak current and capital accounts could ill afford nor a weak investment rate of 16 percent of GDP. On the above counts, the government needs to arrest the depreciation of the exchange rate urgently, the report concluded.