Fiscal adjustment hamstrung by interest payments

ISLAMABAD: Ministry of Planning, Development and Special Initiatives (M/o PD&SI) has cautioned that interest payments are a major challenge for adjustment in the fiscal deficit.

In a summary to the Economic Coordination Committee (ECC) of the Cabinet, in which inflation figures of August 2023 were shared instead of the September figures, released by the Pakistan Bureau of Statistics a day before the ECC meeting, M/s PD&SI maintained that the economy has slowly and steadily started recovering from the downturn in growth.

However, downside risks remain elevated. Agriculture situation has improved as crop outlook has shown substantial improvement over last year. Large-scale manufacturing witnessed slight contraction of 1.1% in July 2023 but with the easing of import restrictions export industries have started picking up.

Shamshad highlights importance of reducing fiscal deficit

Fiscal consolidation efforts are visible from improvement in primary surplus in July, but interest payments remain a major challenge for adjustment in the fiscal deficit. Import deceleration has a significant impact on tax collection as almost 50% of tax revenue is generated from imports.

POL is a major source of revenue but its sales were down by 7% during July-August 2023, having consequences for revenues. Fiscal consolidation will rely more on expenditure side as weaker domestic economic activity and lower growth in major revenue spinners may affect the revenue targets.

Current account adjustment on the back of significant improvement in trade balance during the first two months (July-August 2023) suggests success of external demand management. Global demand has shown improvement, but there is downward trend in remittance inflows as they fell by 21.6% in the first two months. On the inflows side, increase in FDI inflows is encouraging, but disbursements to general government remained weak.

Notwithstanding surge in imports, gross forex reserves remained stable, with slight depletion during September 2023, mainly due to IMF inflows at the start of the fiscal year.

Currency in circulation has contracted by Rs. 669 billion during the period July to September 15, 2023 and the net withdrawals from time deposits stood at Rs. 128 billion which does not augur well with consumer confidence. Net Foreign Assets (NFA) of the banking system witnessed contraction, but those of the State Bank of Pakistan (SBP) increased.

Massive surge in net budgetary borrowing by the government is being witnessed primarily from scheduled banks, which is the consequence of lower external inflows. Credit to the private sector continued to contract in the first half of September 2023.

Inflationary pressures are continuing to persist. However, these declined from a peak of 38 percent in May 2023 and are expected to retain their downward trajectory. Given recent energy price hikes and prevalent uncertainty, inflation expectations of households and businesses are likely to remain at an elevated level.

CPI increased by 27.4% on a YoY basis in August 2023 compared to increase of 28.3%in the preceding month. On MoM basis, it increased by 1.7% in August 2023 compared to increase of 3.5% in the previous month. Major contributor was food inflation with a contribution of 58%. The share of core inflation increased to 38% from 26%.

Urban CPI inflation increased to 25% on a YoY basis in Aug 2023 as compared to 26.2% in August 2022. On a MoM basis, it increased by 1.6% in August 2023 as compared to increase of 3.6% in the previous month. Rural CPI inflation has increased to 30.9% in comparison to 28.8% in August 2023 as compared to an increase of 3.3% in the previous month.

The recent inflationary pressures, especially in kitchen-related or essential items, are reflected in weekly sensitive price index (SPI) released every Friday.

The SPI for the current week ended on 27 September 2023 decreased by 0.02%, as a decrease was seen in the prices of some important food items like tomato (7.1%), chicken (3.8%), bananas (3.1%), sugar (1.6%).pulse gram (0.8%), wheat flour (0.7%), and cooking oil (0.5%).

On the other hand, major increase was observed in the prices of onions (21.4%), garlic (4 49%), potato (1%), cooked beef (0.80), curd (0.3%), egg (0.3%), and pulse Moong (0.3%).

During the week, out of 51 items, prices of 14 (27.46) items increased, 14 (27.4%) items decreased and 23 (45 1%) items remained stable.

The YoY trend in SPI depicts an increase of 37.3% over corresponding week of last year, which was driven by electricity charges for Q1 (118 2%), gas charges for 1 (108.4%),cigarettes (94.7%), rice basmati broken (87.7%), chilies powder (84.8%), sugar (80.2%), rice Irri (79.49%), wheat flour (77.86), Gur (70.6%), tea Lipton (61%), gents sponge chappal (58.1%), salt powdered (56.5%), gents sandal (53.4%), garlic (49.8%) and powdered milk (42.1%).

At the same time, decrease was observed in the prices of tomatoes (47.94%), onions (19.48%), pulse gram (3.986) and mustard oil (0.30%).

Copyright Business Recorder, 2023