IMF Revises Down Inflation and Growth Projections for Pakistan

The International Monetary Fund (IMF) has adjusted its inflation forecasts for Pakistan, anticipating a Consumer Price Index (CPI) averaging 24% in FY24, down from the previous estimate of 25.9%. The revision is attributed to easing food and energy prices, as outlined in the first review report published by the fund.

Despite acknowledging a potential rise in headline inflation due to the November gas tariff increase, the IMF expects a gradual decline overall, influenced by lower core inflation and recent shifts in commodity prices. The report projects year-end inflation at 18.5% for FY24 and 9% for FY25.

In a parallel adjustment, the IMF has lowered its economic growth projection for FY24 to 2%, down from the initial estimate of 2.5%, reflecting weakened domestic demand. Although positive base effects from flood recovery, particularly in agriculture and the textile sector, are evident, persistent external challenges, coupled with tight fiscal and monetary policies, are anticipated to dampen consumption and private investment.

The projected current account deficit (CAD) for FY24 stands at $5.6 billion (1.6% of GDP), below the $6.5 billion projected in the SBA Request. The import rebound is expected to be restrained due to weakened domestic demand, while exports and remittances are also anticipated to be more subdued.

Despite a notable improvement in market sentiment since June, the IMF underscores that risks to debt sustainability remain substantial. Market dynamics, including large gross financing needs and limited external financing, could pose challenges. The global lender emphasizes that decisive program policy implementation, sustained over the medium term, coupled with adequate multilateral and bilateral financing, is crucial for maintaining public debt sustainability.

However, the IMF cautions that policy slippages, insufficient financing, elevated gross financing needs, contingent liabilities, and downward risks to the baseline scenario could narrow the path to debt sustainability. With low reserves and limited market financing, foreign exchange payments present a persistent challenge, with real interest rates absorbing more than half of general government revenue.

The IMF stresses exceptionally high downside risks for the country, citing external financing risks as a major concern. Delays in the disbursement of planned financing from International Financial Institutions (IFIs) or bilateral partners could pose significant risks to the government's program due to limited buffers.

Potential external financing shortfalls might force the government to rely on expensive domestic financing, potentially crowding out private credit. Furthermore, external pressures such as higher commodity prices and tighter global financial conditions, exacerbated by geopolitical conflicts, could impact the exchange rate and external stability. The upcoming elections may introduce additional uncertainty, potentially influencing policy decisions and reform implementation.