According to the Economic Survey of Pakistan FY2022, the Broad Money (M2) witnessed a rise of Rs 1,193.7 billion during March FY2023 as against Rs 698.4 billion during the corresponding period of the previous year. The Net Foreign Assets (NFA) within M2, of the banking system fell by Rs 2060.6 billion as against a decline of Rs 1197.7 billion last year. NFA’s point contribution declined to 7.4 percent as against to pessimistic contribution of 4.9 percent during the corresponding period of the previous year. This shows deteriorated external sector position and depleting FX reserves.
The Net Domestic Assets (NDA) on the other hand, of the banking sector grew by Rs 3254.2 billion as against Rs 1896.2 billion during the corresponding period previous year. Significant growth in NDA is offset by the pessimistic growth of NFA, which contained the growth of M2 during the period under review. The NFA of the State Bank of Pakistan (SBP) observed a contraction of Rs 1,665.8 billion during the period under review as against a decline of Rs 1197.7 billion in last year. This fall was observed on account of payment pressures because of exchange rate depreciation and high international commodity prices.
In addition, the scheduled repayments of external debt grew the gross financing requirements of Pakistan. However, in the absence of adequate external inflows, these payments were partially funded through a drawdown in SBP reserves during the period under review. Whereas, NFA of the scheduled bank declined by Rs 394.8 billion as against an increase of Rs 62.9 billion last year, explained an increase in foreign liabilities of commercial banks. On the contrary, NDA of SBP observed an expansion of Rs 2,617.5 billion against Rs 1,420.3 billion last year. On the other hand, NDA of scheduled banks witnessed an expansion of Rs 636.7 billion against an expansion of Rs 475.9 billion in last year. The significant expansion in NDA was observed mainly because of higher budgetary borrowing. Therefore, M2 growth totally stemmed from growth in NDA which partially offset through a contraction in NFA growth.
Reserve Money grew by 8.8 percent during March, FY2023 as against to growth of 4.5 percent during the corresponding period last year. Reserve Money increased greater than double compared to last year, totally came from growth in NDA of SBP, which was partially offset by negative NFA of SBP. Credit to PSEs observed a rise of Rs 197.1 billion as against an expansion of Rs 4.2 billion during the corresponding period last year.
It is also recorded in the survey that FY2022 closed with significant economic growth of 6.1 percent along with macroeconomic imbalances, emerging inflationary pressures, historic high imports bill and trade deficit and depleting FX reserves resulted in the depreciation of rupees. The growth stemmed from a conducive policy environment for real sector growth including expansionary fiscal and monetary policies. Since September 2021, the state bank of Pakistan (SBP) started monetary policy normalization from 7.0 percent, which was kept unchanged for the last 15 months. Cumulatively, the policy rate was grown by 675 bps to 13.75 percent during FY22.
At the start of FY2023, the economists stated that the economy was confronting both external and domestic challenges; domestic economic activity was expected to moderate because of contractionary monetary and fiscal policies. However, flash floods further aggravated the challenging economic condition and deteriorated economic growth prospects.
In the first meeting of the fiscal year held in July 2022, the policy rate grew by 125 bps to 15 percent with the aim to contain domestic demand and prevent the de-anchoring of inflation expectations. Moreover, in this decision, the rates of EFS and LTFF were linked to the SBP policy rate with a discount of 500 bps. Over the next two meetings held in August and October 2022, the policy rate was kept equal at 15 percent on account of observed desired developments of moderate domestic demand, inflation remained in line with expectations and altered economic viewpoint because of the flood.
The policy rate was grown by 100 bps each in subsequent two meetings held in November 2022 and January 2023. The condition deteriorated after fiscal and external adjustments which changed the inflation viewpoint for FY2023 to 27-29 percent against the November 2022 projection of 21-23 percent. In response to this, the policy rate further increased by 300 bps to 20 percent in the meeting held in March and further by 100 bps to 21 percent in April 2023. Cumulatively, the policy rate was increased by 725 bps during Jul-April FY2023.
In 2023, SBP raised its benchmark interest rate by 100 basis points to 22 percent at an emergency meeting. Analysts revealed that the decision was in line with the demands of the IMF to secure a stalled tranche of $1.1 billion from the current bailout package.
ADB Outlook
Through tighter monetary and fiscal policies to safeguard macroeconomic stability, pervasive inflation, and significant damage from flooding in FY2023 growth in Pakistan was weighed down as per the Asian Development Outlook (ADO).
The significant growth moderation in FY2023 in Nepal reflected unexpectedly sharp effects from various factors, particularly tighter monetary policy driving up interest rates, high fuel prices, and import restrictions imposed to administer falling foreign exchange reserves.
Forecasts for FY2023-24 in both economies are sustained on the assumption that external and domestic conditions would enhance. The government will continue reform as recommended through the IMF under a new policy-support program accepted in July, the ADO April 2023 projection for Pakistan in FY2024 assumed.
South Asia is on course to attain ADO April 2023 growth forecasts. In this year downward revisions for Pakistan and Nepal reflect mostly tighter monetary and fiscal policies and are offset by an upward revision for Bangladesh as net exports performed better than expected.