Economic update for August: Upward adjustment in energy tariffs, fuel price hike to strain inflationary pressures: MoF

ISLAMABAD: The Finance Ministry Wednesday said the upward adjustment in energy tariffs and further increase in fuel prices would strain the inflationary pressures in coming months.

In its monthly, “Economic Update and Outlook” for August 2023 released on Wednesday, the Finance Ministry said the two massive fuel price hikes witnessed in August 2023 and upward adjustment in energy tariffs would strain the inflationary pressures in coming months.

Inflation is anticipated to remain around 29 to 31 percent in August 2023 as the two times raise in fuel prices drives a broad-based increase by impacting the transportation cost.

Ministry of Finance expects inflation ‘to ease out’ in July

However, the expected lagged impact of accumulated monetary tightening, fiscal consolidation efforts of the government and better growth outlook would help ease out inflationary pressures in the latter half of the fiscal year 2024.

The Finance Ministry is upbeat that the extension of Kissan Package-2022 will have a positive impact on the agriculture sector which in turn will contribute to achieving the targeted growth for the fiscal year 2024

Although LSM pattern in the month of June remained negative due to the high base effect and deterred economic environment but for the month of July, the pressure is expected to ease out on the back of a significant rebound in cement dispatches indicating a rise in construction activities and the removal of import restrictions.

The balance of payment position data for the month of July2024 shows that exports of goods and services continued to observe last year’s trend and declined by 3.2 and 1.4 percent, respectively, on a year-on-year and a month-on-month basis.

However, imports have changed their behaviour after lifting the restriction, which increased by 29.8 percent month-on-month in July2024.

This has been translated in trade deficit of goods and services, widened from $1.18 billion in June 2023 to $ 2.4 billion in July 2023.

Similarly, remittances decreased by 19.3 and 7.3 percent on year-on-year and month-on-month basis respectively.

As a result, the current account turns to deficit of $809 million against a surplus of $504 million in June 2023.

The monthly economic indicator calculated for July 2023 shows the revival of economic fundamentals for inclusive growth to achieve the 3.5 percent target as imports will gradually increase in the next months, to increase economic activities.

However, exports are facing both global and domestic headwinds which may hinder growth in the coming months. Taking other factors into account, the current account will remain around the same level observed in July 2023.

The fiscal sector remained under significant pressure during fiscal year 2023 due to various factors.

On the expenditure side, massive floods raised expenditure needs for urgent relief and rehabilitation activities. Additionally, an increase in the policy rate triggered higher mark-up payments, putting pressure on overall expenditures.

On the revenue side, the import compression policy during fiscal year 2023 substantially reduced the revenues from import-related taxes. Additionally, a considerable decline in LSM caused overall industrial activity to deteriorate. All these factors collectively took a significant toll on overall tax collection.

Consequently, the fiscal deficit has been recorded at 7.7 percent of the GDP considerably high from its level set in budget 2022-23.

Going forward, in FY2024, the budget strategy 2023-24 prioritised fiscal consolidation efforts to meet the existing challenges on both revenue and expenditure sides.

The objective is to achieve a primary surplus of 0.4 percent and reduce the fiscal deficit to 6.5 percent of GDP in the fiscal year 2024. To achieve these targets, the priorities are geared towards effective resource mobilisation through various tax measures and expenditure control by adopting austerity measures.

According to the ministry, in fiscal year 2023, the external sector stabilised as the current account deficit contained to $ 2.4 billion against $ 17.5 billion a year before.

On the other hand, the fiscal sector remained under tremendous pressure and the fiscal deficit reached to 7.7 percent of the GDP.

Similarly, industrial activity suppressed as LSM observed negative growth of 10.26 percent.

The fiscal year 2023 witnessed a significant rise in total expenditure by 21.5 percent to Rs16,155 billion against Rs13,295 billion in the previous year mainly due to a 26.6 percent increase in current spending. In absolute terms, it stood at Rs14,583 billion in 2023 against Rs11,521 billion recorded in 2022.

The increase in current expenditure is largely attributed to 83.2 percent rise in mark-up payments while on mark-up spending was restricted to five percent.

Copyright Business Recorder, 2023