The Lahore School of Economics macro model for the Pakistan economy estimates that GDP growth over the fiscal year FY 2023-2024 (Jul-Jun) has been 1.68%. This low estimate of GDP growth for FY 2023-2024, is based on a sustained weakness in sectoral growth over the first quarter (Q1), especially in large scale manufacturing, which has barely broken even, from the contraction of the previous year FY 2022-2023 of - 2.9%, compounded by a weak, below trend growth, recovery in agriculture. Our model projects that GDP growth accordingly should rise to 3.3% for FY 2024-25.
So, a flatline estimation for the annual growth rate of GDP for FY 2022-2023, has been succeeded, by a very weak GDP growth for FY 2023-2024 of 1.68%. Comparable to GOP’s estimate of GDP growth for FY 2023- 2024 of 2.4%. The IMF has a slightly higher estimate, compared to ours, for FY 2023-2024 of 2.0%. The Asian Development Bank and the World Bank have smidge higher estimates, compared to ours, for FY 2023- 2024 of 1.8% and 1.9%, respectively.
The fundamental question is, why is the hiatus in GDP growth persisting since FY 2021-2022?
This report seeks to generalize the structural hypothesis put forward by Chaudhry1 (2019), the ADB (2009)2 and Amjad and Shahzad (2019)3 . focusing on external imbalances, that Pakistan’s GDP growth is simply import constrained. Ergo, Pakistan’s GDP growth is better explained by external imbalances leading to periodic crises, necessitating recourse to IMF bailouts. Showing that over the last decade coming up to FY 2021-2022, low GDP growth, below 5% per annum, keeps a lid on the Current Account deficit. High GDP growth, above 5% per annum, blows up the Current Account deficit and this behavior of the Current Account deficit, is not well explained by exports but imports which are observed to be very elastic with respect to GDP.
We are able to generalize here, that short run GDP growth becomes a function of reserves. With successive cyclicality between low growth and high growth, explaining the current hiatus in GDP growth very well. Each low GDP growth phase requires a buildup of reserves, with recourse to the IMF. Each succeeding high, GDP growth phase of 5.0% per annum and above, is based on built up inherited reserves, which are then exhausted. Completing the cycle, ushering in the next low GDP growth phase of borrowing from the IMF, to replenish reserves.
Read Lahore School report here