ISLAMABAD: Pakistan’s economy might run into challenges switching from a low growth trajectory to a higher one, targeting an expansion of around 5 percent for the fiscal year 2021-22, Ministry of Finance warned.
“Further, in the transition towards a higher potential growth level, pressure can be built on external accounts. Thus, it is important to closely monitor it in order to ensure that the new growth strategy is sustainable without any macroeconomic imbalances as observed in the past” Ministry of Finance said in “Monthly Economic Update and Outlook for July 2021” released here on Wednesday.
The report states the objective of recent accommodative monetary and fiscal policies is to put Pakistan’s economy on a higher growth trajectory. The economic recovery in Pakistan’s main exporting partners is making the external environment favorable. However, recent deadly floods in Germany, China, India, and North America may raise direct and indirect economic losses along the global supply and trade chains.
It is relevant to mention here Pakistan had always faced imbalances on account of twin deficits including the fiscal deficit and current account deficit whenever it moved towards higher growth trajectory of 5 percent and beyond. It is a timely warning from Ministry of Finance that the country was moving towards growth rate of 5 percent so this level should not create imbalances as witnessed in the past. It requires qualitative growth fueling with the help of domestic savings and investments. However, if the growth was fueled through unsustainable path then the twin deficits might reappear on the horizon of the economy.
The ministry in its monthly report stated that the surge in economic growth was expected to continue in FY2022 on account of reopening of economic activities and acceleration in vaccination process. The risk of pandemic still exists; however, the Government may not follow complete lockdown given the public behaves responsibly by following the Covid-related SoPs, the report says.
The following are the key arguments of the report.
Inflation, in recent months, especially the year-on-year rate is on a declining trend. It is hoped this trend will continue in the absence of any major shock. Month-on-month inflationary impulses in July can be considered as a second round effect of previous increase in international commodity prices, from recent increase in gasoline prices, currency depreciation, and monetary expansion. Furthermore, the month of July tends to show a positive seasonal inflation effect. On the other hand, international food prices declined in June and the government efforts to increase the efficiency of domestic food markets are still in place and are continuously being monitored and strengthened. The dividends of positive market intervention may ease the pressure on prices and as a result year-on-year inflation in July, 2021 is expected to decelerate in the range of 7.5–9.0 percent.
Regarding agriculture, the availability of inputs is sufficient and it is expected that the sector will continue to perform well on account of continuing support of the government. The government has launched “Prime Minister’s Fiscal Package” for Kharif crops, which will provide subsidy through provinces using their existing mechanisms on sharing basis (75:25) for using fertilisers for cotton and rice (DAP Rs1500/acre) to cover 70 percent of targeted cultivated areas and 100 percent share of federal government for cottonseed (Rs1200/acre) to cover 66 percent of targeted cultivated area and for white fly (Rs1200/acre) to cover 70 percent of targeted cultivated areas. Federal share (75 percent) for subsidy on fertilisers would be Rs10.216 billion and for subsidy on cottonseed and whitefly would be Rs8.942 billion. Activities in the industrial sector measured by LSM (large-scale manufacturing) index are highly exposed to external shocks. There is some volatility experienced in the manufacturing sector caused by market conditions. In recent months, month-on-month growth of LSM has been negative, but seasonally adjusted month-on-month growth rates remained positive.
In June, it is highly likely that LSM will return to positive month-on-month growth. Usually, last quarter of the fiscal year is marked with negative growth of LSM (month-on-month) due to seasonal effects. On a year-on-year basis, recent months have shown significant LSM growth rates, which is expected to continue in July. This reflects low base effects, but also the strong momentum of the current economic expansion.
As indicated by the MEI, economic growth momentum has strengthened considerably since March and has remained robust during the last quarter of FY2021. BOP (balance of payments) data revealed strong expansion of imports of goods and services, especially in June. Imports in June 2021 increased $1.6 billion as compared to May due to seasonal factors.
It is expected in coming months, imports of goods and services may settle below the level observed in June. The observed growth momentum is driven by production side of the economy. This is also reflected in the exports of goods and services, which according to BOP data increased about $0.5 billion in June as compared to May. It is anticipated that exports will remain at the same level and consequently trade balance in goods and services will improve in coming months. These expectations depend on the absence of unexpected shocks for example those that may be generated by the recently observed surge in domestic and foreign Covid-19 infections.
The remittance flows are expected to continue their momentum in coming months. Taking these into account, as well as the other secondary income flows and the primary income flows, the current account is expected to remain in deficit slightly. These developments require further monitoring for smooth continuation of economic activities. Despite significant challenges, the current fiscal performance is largely in line with government’s strategy to ensure fiscal discipline, increasing revenues and controlling expenditures.
The government is highly committed to strike a balance between fiscal deficit and economic stimulus package due to Covid-19 without hurting the economic growth. It is evident by the fact that the fiscal deficit is contained at 4.6 percent of GDP during July-May FY2021, while the primary balance remained in surplus throughout this time. Government’s continuous efforts for resource mobilisation are bearing fruits.
FBR (Federal Board of Revenue) tax collection exceeded the target by Rs 41 billion during FY2021 owing to effective enforcement measures. Keeping in view the post Covid economic recovery it is expected that the revenue performance shall improve further in the new fiscal year. The continuation of current fiscal strategy would ensure long term fiscal discipline and sustainability.