Finance ministry sees more tough times ahead.

ISLAMABAD -- Hinting at a further increase in the policy rate by the State Bank of Pakistan, the Ministry of Finance anticipates 'blurred growth prospects' for the economy, which could be marred by the prevailing inauspicious global environment and higher domestic inflation, going beyond 15 per cent, in the upcoming fiscal year set to begin on Friday.

'Despite achieving the growth of 5.97pc in FY2022, the underlying macroeconomic imbalances associated with domestic and international risks are making growth outlook indistinct,' said the ministry's Economic Adviser's Wing (EAW) in its Monthly Economic Update for June and Outlook.

At the same time, the EAW also warned that SBP's demand management policy was unlikely to be successful in the face of supply side constraints and higher international commodity prices and may further cause erode to income levels.

'Economic growth in Pakistan is facing challenging situation due to wider macroeconomic imbalances,' the report said, though highlighting that the current account deficit, which remained high during the first three quarters, may decelerate by the end of this fiscal year and onwards.

'Inauspicious' global environment, higher domestic inflation blamed for 'blurred growth prospects'

It said the delayed pass-through of international oil prices into domestic energy products was expected to increase inflation even though inflationary pressure may ease once international commodity prices start to decline and stabilise.

Going forward, Pakistan's growth prospects are expected to remain satisfactory. But the number of potential risks may diverge it from optimal path. First, the cyclical position of Pakistan's main trading partners is somewhat deteriorating. Their central banks are raising interest rates to counter inflation, thus leading to possible recession in those countries.

'Second, SBP may further raise domestic interest rates,' said the economic outlook, warning that SBP's demand management policy may not be very effective as the current waves of inflation are largely caused by supply constraints and increasing international prices, especially commodity prices. 'Exchange rate depreciation is also a source of concern as it makes the imported raw material more expensive,' it added.

Third, the persistent rise in domestic consumer prices is eroding real incomes, limiting the spending power of consumers and investors. 'These risk factors may challenge the...