Finance ministry report: Economy recovering from macroeconomic instability, Covid-19

ISLAMABAD: Pakistan’s economy has been recovering from two consecutive crises first in the shape of macroeconomic instability to correct the accumulation of unsustainable Balance of Payment (BoP) deficit and second from COVID-19 pandemic, finance ministry’s report said Thursday.

In its monthly economic outlook report released by the finance ministry, the country’s economy is currently recovering from two consecutive crises. The first one that continued in most of 2018 and 2019, which compelled necessary macroeconomic adjustments needed to correct the accumulation of unsustainable external BoP deficits. The second one is associated with worldwide lockdowns including Pakistan during February – August 2020 due to COVID-19 pandemic.

The recovery from both of these shocks is under way and promises strong growth in the current fiscal year. The main risk factor to this scenario is the recently observed resurgence of new waves of infections worldwide and also in Pakistan, necessitating imposition of new restrictions on social contact that may impact the economic expansion. The effects on the economic outlook will depend on the intensity of pandemic and duration of restrictions.

“But specific well-designed government policies both domestically as well as in Pakistan’s trading partners may soften the economic burden of these necessary restrictions,” the report further said.

In the medium to long-term, inflation is driven by monetary and fiscal developments, international commodity prices, especially for food and oil products, the exchange rate and inflation expectations. In the short run, seasonal factors, supply disruptions and distortions in domestic food markets may play a role. Recent trends in inflation are shown in MoM inflation was low and on average negative during the period February-May 2020.

During January – April 2020, MoM growth of international oil and food prices were negative on average, while the dollar exchange rate did not play any major role. These developments were reversed from May 2020 onwards. Oil prices have increased from May to August, but have stabilised since then. On the contrary, international food prices continued to rise. Government policies were put in place to mitigate the effects of international food prices on domestic prices and to monitor and improve the functioning of the domestic markets. In November, MoM inflation came down to 0.8 percent from 1.7 in October which is expected to reduce further in December. Thus, for YoY in December, inflation is expected to fall within a range of 7.8 and 8.3 percent.

Agriculture: On the basis of input availability and better weather forecast, the prospects for growth in agriculture are bright with the YoY growth rate of LSM. In every month since July 2020, the YoY growth rate of LSM was positive. Industrial activity has now again fully recovered from the downfall following the preceding BoP crisis. The necessary adjustments to curb unsustainable external deficits had depressed LSM in 2019. In recent months, LSM is now also on its way to recover from the COVID-19 crisis that caused industrial output to fall significantly in March and April this year.

The Monthly Economic Indicator (MEI) is based on combining monthly data of indicators that are proven to be correlated with GDP at constant prices. The MEI is scaled to align with annual GDP growth. Fig-13 presents the MEI on monthly basis since January 2019. Based on available data, the MEI shows continued better growth in November, in continuation with the trend observed in the previous four months. It follows that after a strong first quarter, economic growth remains persistent also in the first two months of the second quarter.

During July – November exports of goods and services, as compiled in the Balance of Payments reached $12 billion as compared to $13 billion in the same period of last year. Likewise, imports of goods and services reached $21 billion this year against $22 billion last year. The trade balance thus remained at the level seen in July-November FY 2020. Based on current information, it is expected that the same trend will hold in December as well. For the first two quarters of the current FY, it is expected that exports will remain around levels observed in the corresponding period of previous FY while imports will remain slightly lower. This indicates that the ongoing economic recovery mainly represents increased domestic production for use in domestic markets.

Remittance inflows keeping its trend seen in previous months will remain at a high level and are expected to compensate for the trade balance deficit in the first half of the current FY.

Fiscal: Despite the challenges, fiscal performance is encouraging, especially on revenue side. Despite a fast-tracking of refunds, FBR tax collection has increased. It is expected that FBR’s concerted efforts to improve the tax collection through various policy and administrative measures will give further rise to tax collection in the coming months. Moreover, with the current pace of tax collection, FBR is likely to achieve its tax collection target for the first half of current fiscal year.