ISLAMABAD: The Finance Ministry has said that Pakistan’s economic outlook is surrounded by global and domestic uncertainties with unabated geopolitical tensions, globally higher inflation as well as interest rate showing tendencies to rise and weakening rupee against the dollar.
The Ministry of Finance “Update and Outlook” on the economy for the month of August 2022 noted that there was a decline of 7.8 percent in remittance in July 2022 over the same month and an increase of 2.7 percent in exports, and an increase of 0.3 per cent, whereas, the FDI decreased by 43.3 per cent and total foreign investment by 95.5 per cent.
The economic outlook is surrounded by global and domestic uncertainties. Geopolitical tensions remain unabated, worldwide inflation remains high, interest rates show tendencies to rise, and the US dollar strengthens. Pakistan’s external environment is therefore facing increasing challenges whereas domestically, the government has taken necessary measures to comply with International Monetary Fund (IMF) requirements that further fueled the inflation.
However, these measures also have the positive effect of alleviating the external financing constraints. In addition, recent floods caused by abnormally heavy monsoon rains has adversely affected important and minor crops which may impact the economic outlook through agriculture performance, added finance ministry.
The year-on-year and month-on-month inflation have been accelerating drastically in June and July due to pass-through of high international commodity prices and exchange rate depreciation into domestic retail prices. On the other hand, during the last 12 months, money supply growth was compatible with a low and stable inflation rate. But the recent supply shocks have brought the CPI to a level much higher than one year ago and taking into account, the expectation that domestic retail prices may further increase in August 2022 compared to July 2022.
The recent floods have reduced the potential output of both main and minor Kharif crops, thereby tempering the positive outlook of the agricultural sector and LSM growth is most exposed to the developments in international markets. In July, international economic slowdown and domestic negative seasonal effects may drag down LSM as compared with its level recorded in June. But on year-on-year basis, LSM may stabilize or show limited growth.
Overall economic activity as per Composite Leading Indicators (CLI), has in recent month in Pakistan’s most important export areas has shown gradually deteriorating, reflecting negative output gaps. It seems that in June and July, Pakistan is also experiencing a growth slowdown, and even the economy’s output gap may also have turned into negative territory in the month of July. Nevertheless, overall economic growth in Pakistan remains positive due to a continuing high growth path of potential output.
On the fiscal side, deficit surpassed the revised target of 7.1 per cent of GDP and stood at 7.9 per cent in the last fiscal year (2022). However, in 2023, the fiscal deficit is expected to reduce to 4.9 per cent of GDP, while the primary balance is likely to be in surplus of Rs153 billion and to achieve the set targets, the budget fiscal year 023 is focused on stabilizing the economic growth, increasing revenues, enhancing exports, and protecting the vulnerable segments of society through relief measures and pro-poor initiatives.
According to the Finance Ministry’s update wary forward, inflation has continued to accelerate in recent months, mainly due to supply shocks that have created very significant monthly impulses on the CPI level. If these monthly impulses can be contained to more normal levels in future months, inflation may start to decelerate. But even then, year-on-year inflation may stay in double digit for the rest of the current fiscal year.
Economic growth remains positive. But restrictive demand management and high inflation may cause Pakistan’s cyclical position to deteriorate in the coming months. This cooling off may bode well for the trade balance and by extension for the current account balance, official reserves, and the exchange rate.
Copyright Business Recorder, 2022