Pakistan Economic Outlook
Data suggests the economy has weakened so far in FY 2023 (July 2022–June 2023). Exports fell 9% year on year in July–January, and the Purchasing Managers’ Index has been bogged down in contractionary territory. Floods from June to October caused an estimated USD 40 billion in damage and, by destroying crops, have inflamed inflation and import costs. Adding to these headwinds, remittances fell 11% yoy in July–January. These factors have drained the Central Bank’s international reserves, which stood at just three weeks’ import cover as of 3 February, and have caused all major rating agencies to downgrade Pakistan’s credit rating over the past several months. To avoid default, the government needs a deal with the IMF, leading it to recently liberalize the currency, remove fuel subsidies and approve a bill to raise USD 636 million in taxes this FY. These moves will depress domestic demand ahead.
Inflation rose to 27.6% in January (December: 24.5%) on accelerating food prices. Inflation should ease this year as domestic demand and commodity prices cool. That said, our panel raised their 2023 inflation forecasts this month due to the recent currency liberalization and fuel price hikes. Key factors to watch are the weather, subsidies, the currency and commodity prices.