Economy at risk from high prices, new variants, Afghan unrest

ISLAMABAD: Ministry of Finance has put up some red flags as the country’s economic outlook remains at risk from uptrend in world commodity markets, new pandemic waves, and Afghan unrest, The News has learnt.

“Due to the government’s growth-oriented policies, Pakistan’s economy is set to achieve higher, inclusive, and sustainable economic growth in FY2022,” stated Economic Outlook for September 2021 released by Ministry of Finance here on Tuesday.

“However, there are some downside risks to the outlook of Pakistan’s economy associated with rising international commodity prices, new variants of virus and geopolitical dynamics especially post August 15 scenario, emerged in Afghanistan.”

The Ministry highlighted major risks including rising inflation and current account deficit.

In the short term, it emphasises that the sustainability of the current growth requires that the trade deficit remains manageable.

In this regard, import dynamics are being closely monitored. Exports can benefit from the current domestic and foreign economic dynamism.

It is mentionable that inflation in some of Pakistan’s main export markets is rising significantly. However, domestic inflation is expected to decline. “Maintaining Real Effective Exchange Rate (REER) at the current level, the need for depreciation of the rupee exchange rate is reduced significantly” it said and added that the government policies for export promotion would also anchor for providing external sector stability.

The Current Account posted a deficit of $2.3 billion (4.1 percent of GDP) for Jul-Aug FY2022 as against a surplus of $838 million (1.8 percent of GDP) last year. The current account deficit widened due to the constantly growing import volume of energy and nonenergy commodities, along with a rising trend in the global prices of oil, Covid-19 vaccines, food, and metals.

Exports on FOB (Free on Board) basis grew 35.4 percent during July-August FY2022 and reached $4.6 billion ($3.4 billion last year). As per PBS, during July-August, FY2022, exports increased 27.9 percent to $4.6 billion ($3.6 billion last year).

In July-August FY2022, total foreign investment registered an inflow of $1,164.9 million, while FDI (foreign direct investment) was recorded at $ 203.1 million ($254.8 million last year). On month-on-month basis in August 2021, FDI stood at $113.2 million ($89.9 million in July 2021), up 25.9 percent. FDI received from China was $53.9 million (26.5 percent of total FDI), United States $32.2 million (15.8 percent), Singapore $23.1 million (11.4 percent of total FDI), and from Hong Kong it was $18.6 million (9.2 percent).

Pakistan’s inflation rate is mainly driven by the demand factors as well as international commodity prices, exchange rate, seasonal factors and economic agents’ expectations concerning the future developments of these indicators. In September, month-on-month inflationary impulses may come from second round effects of previous increases in international commodity prices, currency depreciation, and some seasonal factors.

On the other hand, the government efforts to temper the pass-through of international commodity prices into domestic retail prices are still in place and being continuously monitored and strengthened. Furthermore, new price impulses in September may have been somewhat compensated by significant base effects.

If no new inflationary impulses would have occurred in September as compared to August, year-on-year inflation may decelerate in September 2021. However, taking into account new price impulses in September and the low base effect, YoY inflation in September is likely to resume its declining trend observed in recent months. Based on current information, the September inflation rate is expected to end up between 7.5 percent and 8.4 percent.

With available information there is 20 percent increase in cotton production, likewise news about sugarcane production is also encouraging. Agriculture credit disbursement has shown a growth of 7.5 percent during July-August FY2022. Further, other input availability is also satisfactory, thus it is expected in absence of any adverse climate shock that agriculture sector growth will remain as per target of 3.5 percent. After taking into account the substantial revisions in past LSM (large-scale manufacturing) data (especially for July and August 2020) as published by PBS in September, the LSM index for July was found close to expectations. For August, it is expected that LSM will roughly stabilise around the level observed in July, but will still show healthy YoY growth.

Exports of goods and services in August 2021 according to BOP data were not far behind the expected $3 billion mark. For next month, the ongoing strong recovery in Pakistan’s main export markets, the momentum in domestic economic dynamism, and specific government policies to stimulate exports are expected to get exports of goods and services above the $3 billion level and more in the subsequent months.

These expected developments would reduce the balance on trade in goods and services around $3 billion in September 2021, as well as in the coming months. If remittances were to stabilise approximately $2.5 billion and taking into account the other secondary and primary income flows, the current account would remain in deficit but in manageable range.

Similarly, the government is dealing with the 4th wave of pandemic through effective containment measures so that economic activities may not be disrupted. Moreover, the government is accelerating vaccine procurement so that a large number of people can be protected against the virus. Therefore, with higher development and Covid-19 related spending, overall expenditures may likely to come under pressure. On revenue side, FBR tax collection grew by 47.4 percent to Rs442.3 billion in the month of August, FY2022 against Rs300.0 billion in the comparable period of FY2021. Tax collection has surpassed the target by Rs94 billion set for the month of August. FBR tax collection continues to be strong, showing that domestic economic activity is on the upswing. In addition, efforts to boost tax collection are yielding results. It is expected that FBR tax collection would achieve its target.

Pakistan’s economy is currently on a higher growth path. For long-term enhancement and sustainability of economic growth, it is important that it is driven by the expansion of domestic production.

Value-added creation generates income that can be spent on consumption and investment. Attaining a sustainable higher growth path requires a much larger proportion of the value added to be directed towards the gross fixed capital formation, instead of consumption. This can be managed by appropriate long-term structural policies, which are being implemented by the government, it concluded.