ISLAMABAD: The Finance Division has emphasized the intense need for a successful completion of the International Monetary Fund (IMF) combined 7th and 8th reviews of the Extended Fund Facility (EFF) because high international prices are still adversely affecting the external positions even in the start of the fiscal year, 2023.
Monthly “Economic Update and Outlook July 2020” uploaded by the Finance Ministry on its website noted that the government has taken all difficult decisions to make the reviews successful, reaching a staff-level agreement for a $ 1.17 billion loan tranche. However, ongoing political unrest is not only creating the governance problems but on the other hand, intensifying the uncertainties depicted by exchange rate depreciation, which will in turn impact the cost of production. Halting investment decisions is further making the outlook blurry, it added.
There is concrete evidence that external and internal factors are driving the inflation in the country as not only international commodity prices, especially oil and food prices but the depreciation of the exchange rate influences domestic inflation. There is no doubt that most inflation in the last two months is also coming from supply shocks whose impacts have overshadowed government efforts in maintaining prices. The higher interest rate followed by monetary contraction is also adversely affecting the perception of the outlook of the economy.
The recent decline of petroleum prices by the government resulted in a decline in weekly SPI but market expectations and supply side factors are contributing to inflation.
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In June 2022, average international oil prices continued to increase and since January 2022, the average month-on-month international oil price inflation was around 8.5 percent per month. On the other hand, in June, the international food price index declined, but its average month-on-month inflation since January 202 remained at three percent per month.
These international inflationary impulses in the dollar became amplified by the accelerated depreciation of the rupee against the dollar. International spike in dollar rates and domestic uncertainty depreciated Pakistani rupees to almost 11.5 percent in the first 20 days of the fiscal year 2023. These cost-push inflation drivers feed into the domestic retail prices. The Ministry expressed the hope that year-on-year inflation in July 2022, may hover around the level of June which is also due to a low base of 8.4 percent in July 2021.
Although the agriculture sector will continue to grow on account of supportive government policies, the unprecedented rains causing floods may hamper cotton and other minor crops while industrial activities, measured by the large-scale manufacturing (LSM) index is the sector that is most exposed to external conditions.
As expected, LSM output slightly contracted in May as compared to April, but its year-on-year growth rate remained on a positive trend.
According to the monthly update, the remittances after a 6.1 percent increase in the last fiscal year stood at $31.2 billion against $29.4 billion a year before, and exports, after a growth of 26.6 per cent growth, increased to $32.5 billion from $25.6 billion, imports ballooned to $72 billion from $54.3 billion after a growth of 32.8 per cent. As a result, the current account deficit widened to $17.4 billion in the fiscal year 2021-22 from $2.8 billion in 2020-21.
After 2.6 per cent growth, foreign direct investment in the country was increased to $1867.7 million during 2021-22 from $1820.5 million during 2020-21. However, there was a massive decline in portfolio investment of 87.9 per cent in the last fiscal year and consequently the portfolio investment was contracted to $309.5 million in 2021-22 from $2,555.3 million a year before.
Total foreign investment – FDI and Portfolio investment contracted to $1,788.9 million during the last fiscal year from $ 4,582.4 million a year before, reflecting a decline of 61per cent. The country’s foreign exchange reserves have declined to $14.358 billion on 25th July 2022 from $24.87 billion on 23rd July 2021, with SBP foreign exchange reserves to $8.5 billion from $17.8 billion and banks forex to $5.8 billion from $7.04 billion. Exchange rate (Pak Rupee against US dollar) depreciated to Rs229.88 on 25th July 2022 from Rs162.33 on 23rd July 2022.
The fiscal deficit was recorded at Rs3,468 billion during July-May 2022 against Rs2,197 billion for the same period a year before and the primary deficit stood at Rs945 billion during July-May 2022 compared to Rs139 billion for the same period a year before. The PSDP disbursement including grants to the provinces stood at Rs518 billion in July-May 2022 as opposed to Rs482 billion for the same period of the last fiscal year. Non-tax collection federal during July-May was recorded at Rs1,124 billion compared to Rs1,281 billion for the same period a year before, according to the economic update.
Copyright Business Recorder, 2022