Pakistan’s economy to rebound in 2024, IMF aid crucial

KARACHI: Pakistan's economy is set to recover from a contraction in the current fiscal year and grow by 2.1 percent in 2024, boosted by easing supply bottlenecks, lower interest rates scenario, and continued support from the International Monetary Fund (IMF), a Bloomberg economist said.

Ankur Shukla, a Bloomberg economist based in Mumbai, said in a report released on Wednesday that Pakistan's economic outlook has improved after approval of $700 million loan tranche from the IMF in November and growth will likely accelerate to 4.8 percent in fiscal 2025. 

"More aid from the IMF is needed. We think this will materialize. In addition, the central bank will likely start cutting rates in March to boost demand," Shukla said.

He added that the IMF estimates that Pakistan needs about $30 billion annually through fiscal 2028 to pay its external debts and buy imports, while its foreign exchange reserves currently stand at a mere $7.3 billion.

"We expect Pakistan to negotiate a new longer-term deal with the IMF once the current program ends in March." Shukla said that there are a number of positives for growth in 2024, such as increased farming acreage, removal of import restrictions, and lower borrowing costs.

"Our monthly tracker shows activity grew 3.2 percent between June and October. Aid from the IMF in July helped prop up activity which had fallen by 8.5 percent between January and June," he said.

He added that dollar loans from creditor countries and multinational lenders, following more aid from the IMF, will help shore up dollar reserves and allow more purchases of raw materials and machinery that facilitate increased production.

Shukla said that increased farming acreage compared with 2022, when crops were devastated by floods, is likely to yield higher agricultural output. "Official data for the July-September quarter shows that rice sowing areas have increased 21 percent compared with 2022. Those for cotton have increased 11% and maize's cultivation area is up by 5 percent."

He noted that the growth figures will also benefit from a low year-earlier base of comparison. However, he said that there are also some headwinds to the rebound, such as elevated taxes, high fuel and energy bills, and sharp increases in debt servicing costs, which have reduced consumer spending power and constrained the space for fiscal spending.

Shukla said that he expects the general election scheduled for February to lead to greater political stability and investor confidence, and that any new government will abide by the IMF terms and complete the current program successfully.

However, he warned that any trouble around the elections or disruption to the IMF aid could cause growth to undershoot his baseline projection. Shukla said that Pakistan's growth will also benefit from a low year-earlier base of comparison, as the economy contracted by 0.2 percent in the year through June 2023.

He said that inflation, which averaged 29% in the first five months of the current fiscal year, will slow to 24% in 2024, as higher domestic agricultural production, lower global oil prices, and a high base effect will help cool prices.

"Hikes in energy prices to fulfill the IMF’s aid terms have kept inflation elevated this fiscal year. Rupee depreciation has also lifted prices. ... Higher domestic agricultural production will probably help cool food inflation in 2024. The government has been reducing retail petrol prices since October and lower global crude oil prices will probably allow for further cuts."

Shukla also said that the State Bank of Pakistan, which raised its key policy rate by 600 basis points to 22 percent in the first half of 2023 to curb inflation and stabilize the currency, will likely start cutting rates from March as inflation slows.

"We expect it to continue to hold , and refrain from cuts, in December and January, given that inflation will likely stay elevated. ... We forecast the policy rate will be slashed by 700 basis points to 15 percent by end-2024," he said.