IMF’s FY23 big projections for Pakistan fail to account for flood impact
• Fund cuts global growth forecast to less than 2% • Says US, EU, and Chinese economies will continue to stall • Advises policymakers to keep a steady hand as storm clouds gather
ISLAMABAD: The International Monetary Fund (IMF) cut its forecast for global economic growth to below 2% on Tuesday, citing persistently high inflation and warning that the worst was yet to come.
In its World Economic Outlook (WEO) 2023 – Countering the Cost-of-Living Crisis, the global lender of last resort predicted that Pakistan’s GDP would grow by 3.5% and inflation would be around 20%. However, it added a disclaimer that “the 2022 projections for Pakistan are based on information available as of the end of August and do not include the effects of the recent floods.”
On the same basis, the fund predicted that Pakistan’s current account deficit for the current fiscal year would be 2.5 percent of GDP, down from 4.6 percent last year, and that the unemployment rate would be 6.4%. So, all of these estimates are based on old information that has changed a lot in the past few weeks. Last week, the World Bank said that Pakistan’s growth rate would be 2%, while the Asian Development Bank said it would be 3.5%.
The IMF said that its projections show that global growth will slow from 6% in 2021 to 3.2% in 2022 and then to 2.7% in 2023, which is 0.2 percentage points less than what was predicted in July. There is a 25% chance that it will drop below 2%.
More than a third of the global economy will shrink this year or next, and the world’s three largest economies—the United States, the European Union, and China—will continue to stay the same. “In short, the worst is yet to come, and for many people, 2023 will feel like a recession,” it said, adding that Russia’s invasion of Ukraine continued to strongly destabilise the world economy.
The fund told policymakers around the world to keep calm as storm clouds gather. It said that the steep economic problems the world is facing are caused by the lingering effects of three powerful forces: the Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and growing inflation pressures, and the slowdown in China.
The WEO predicts that global inflation will go from 4.7 percent in 2021 to 8.8 percent in 2022, then go down to 6.5 percent in 2023 and 4.1 percent in 2024. Most upside inflation surprises have happened in advanced economies, while in emerging markets and developing economies, there has been more variation.
The fund told policymakers in emerging markets that now was the time to tighten up. Countries that are eligible and have good policies should think about getting access to precautionary instruments from the IMF as soon as possible to improve their liquidity buffers. At the same time, the countries should try to minimise the effects of future financial turmoil through a mix of preventive macroprudential and capital flow measures, where appropriate, because too many low-income countries were in or close to debt distress.
The IMF said that the most affected countries needed to move quickly toward orderly debt restructurings through the Group of Twenty’s Common Framework to avoid a wave of sovereign debt crises. Time might be running out soon.
The WEO pointed out that the energy and food crises, along with the very hot summers, show very clearly what an uncontrolled climate transition would look like. “Many steps are needed to implement climate policies that will stop climate change from becoming catastrophic,” it said.
The fund said that the priority of fiscal policy was to protect vulnerable groups by giving them targeted short-term help to ease the effects of the global cost-of-living crisis. But the bank should keep its overall stance tight enough to keep monetary policy on track. In order to deal with the growing government debt stress caused by slower growth and higher borrowing costs, debt resolution frameworks need to be significantly improved.
As financial conditions get tighter, macroprudential policies should keep an eye out for systemic risks. By making structural reforms more intense to boost productivity and economic capacity, supply constraints would be eased, which would help monetary policy fight inflation.
On the other hand, the WEO noted that risks to the outlook remain unusually large and to the downside. Monetary policy could make a mistake about what action to take to lower inflation. Policy paths in the world’s biggest economies could continue to be different, which could cause the US dollar to rise and make things worse between countries. Also, if there are more shocks to the prices of energy and food, this could make inflation last longer. Tighter financing conditions around the world could cause widespread debt trouble in emerging markets.