Lahore School of Economics

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State of the Pakistan Economy, Quarter One Based Estimates of Flood Damage for Annual Growth in Pakistan

Financial Year 2023

The Lahore School of Economics macro model for the Pakistan economy projects that GDP growth over the fiscal yearJuly 2022 – June 23, (FY2023), will be 2.38 percent. The flood damage to lives, livelihoods and incomes, over just the firstquarter (Q1) of the fiscal year, from July to September 2022, have taken their devastating toll.

The Lahore School’s projection of GDP growth is comparable to the IMF’s estimate for Pakistan, made in October 2022, of GDP growth of 2 percent for FY2023.

Their model also uniquely estimates a supply shock, positive or negative. Which then feeds into a demand shock. To give a final change in GDP for FY2022.

The estimation begins with the supply shock, by assuming an impact of the floods as observed over Q1, July to September 2022. Then, a further caveat is added, that this estimation of the supply shock delivered by the floods, is based only on income loss.

With these caveats, the total impact of the floods on agriculture and non-agriculture is estimated, in Q1 of FY2023, at $11.7 billion.

GOP faces an enormous output gap minimally estimated here $12 billion. Its forex reserves have dwindled to $7 billion.With the extension of the IMF’s EFF covering virtually all of FY 2023, its fiscal stance is extremely limited by the terms of the agreement with the IMF.

That does leave it to the monetary policy to generate growth and support welfare. Monetary policy is primarily occupied with controlling inflation raging at 23% per annum. Largely using the interest rate peaking at 15% per annum.

However, the Lahore School has argued in their last report on the State of the Economy FY 2022, that at least a quarter ofthis inflation rate is being contributed to by the massive depreciation of the exchange.

Further, research at the Lahore School shows that depreciation of the exchange rate sets in place depreciationary expectations, leading to increased capital outflows. Which of course Pakistan’s weak Current and Capital Accounts can illafford. Nor can a weak investment rate of 16% of GDP.

Related: Think-tank Lahore School of Economics cuts GDP forecast on catastrophic flood

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posted by S A J Shirazi @ 10/27/2022 09:20:00 AM,

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