ISLAMABAD, April 12, 2023: Amid political and economic turmoil, the International Monetary Fund (IMF) has slashed Pakistan’s GDP growth rate projection from 2.5 per cent to 0.5pc for the fiscal year 2023-24.
Fifth most populated country in the world, Pakistan is expected to experience inflation more than anticipated, reported a world economic outlook report released by the global lender on Tuesday.
The report projected the inflation at 27.1pc and the current account deficit at 2.3pc of the Gross Domestic Product (GDP) for FY23. On the other hand, the unemployment rate would rise to 7pc, 0.8pc higher than that of FY2022, stated the report.
The report also indicated a downfall in inflation and an upward trend in GDP growth at 21.9pc and 3.5pc respectively in FY24. However, the next fiscal year would see the current account deficit going up to 2.4% of the GDP.
The unemployment rate has also been projected to go down to 6.8pc in FY2024.
The IMF’s downgrading comes days after the World Bank (WB) and the Asian Development Bank (ADB) lowered Pakistan’s growth rate projections to 0.4pc and 0.6pc, respectively.
Also Read: Inflation, trust-deficit main reasons for slow economic growth: WB reports
As for the world’s economy, the IMF downgraded its outlook for global economic growth. The IMF envisioned growth this year of 2.8pc, down from 3.4pc in 2022 and from the 2.9pc estimate for 2023 it made in its previous forecast in January.
The fund said the possibility of a “hard landing,” in which rising interest rates weaken growth so much as to cause a recession, has ”risen sharply,” especially in the world’s wealthiest countries. Those conditions are also increasing the risks to global financial stability, the fund warned.
The IMF, a 190-country lending organization, forecasted 7pc global inflation this year, down from 8.7pc in 2022 but up from its January forecast of 6.6pc for 2023.
— IMF flashes financial risk warnings but urges continued inflation fight —
The International Monetary Fund warned on Tuesday that lurking financial system vulnerabilities could erupt into a new crisis and slam global growth this year, but urged member countries to keep tightening monetary policy to fight persistently high inflation.
The warnings set an ominous tone for the IMF and World Bank spring meetings in Washington this week, with conflicting economic and market forces clouding the policy path as growth slows in response to rapid central bank interest rate hikes.
The IMF on Tuesday edged its 2023 global growth forecasts lower, its baseline assumptions excluding, for now, a major new flare-up of financial system turmoil after the failures in March of US lenders Silicon Valley Bank and Signature Bank and Switzerland’s forced sale of Credit Suisse.
The Fund’s World Economic Outlook forecast real GDP growth of 2.8pc in 2023 and 3.0pc in 2024 – one-tenth of a percentage point lower than what it predicted in January for each year. The global economy grew 3.4pc in 2022.
The downgrades reflected weaker performances in some larger economies, such as Japan, Germany, India and Brazil, offsetting a stronger performance in the United States and a shallower contraction in Britain. The IMF also cited expectations of tighter financial conditions this year.
But its forecast was dominated by downside risks, including even higher inflation, an escalation of the war in Ukraine and a severe adverse scenario of a new financial crisis that could prompt sharp pull-backs in lending and household spending and a rush into safe-haven assets. The latter could slam global growth back to about 1% this year, effectively a recession on a per-capita GDP basis.
‘PERILOUS’ RISKS
The IMF’s Global Financial Stability Report warned of a “perilous combination of vulnerabilities” in financial markets, saying that some participants had failed to adequately prepare for the impact of interest rate increases.
Such risks had increased rapidly in the wake of last month’s turmoil in the global financial system, with investors remaining on edge and some looking for the next weakest link that could spread contagion, IMF officials said.
“Even if you think that on average, banks have a lot of capital and liquidity, there could be these weak institutions that then spill back into the system as a whole,” Tobias Adrian, the director of the IMF’s Monetary and Capital Markets Department, told Reuters.
Despite the warnings, the IMF’s chief economist, Pierre-Olivier Gourinchas, said inflation is still the bigger problem and that price stability should take precedence over financial stability risks for central banks’ monetary policy. Only in the event of a very severe financial crisis should those priorities be reversed, he said in a news conference.
YELLEN PUSHBACK
US Treasury Secretary Janet Yellen pushed back on the IMF’s outlook, telling a separate news conference that the outlook was “reasonably bright” though she said she was staying “vigilant” to downside risks including banking pressures and the war in Ukraine.
“I wouldn’t overdo the negativism about the global economy,” Yellen said, adding that a number of economies, including the United States, were proving resilient with strong labor markets, easing supply chain problems and lower energy costs.
Yellen said she had not seen evidence of a squeeze in credit after the SVB and Signature Bank failures, and that the US banking system was sound, with strong capital and liquidity positions. She added that the global financial system was also resilient due to reforms enacted after the 2008 financial crisis.