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Finance Ministry’s Report Shows That Pandemic Risk Still Exists

The Ministry of Finance has identified the ‘export of sufficient proportion of additional production’ and ‘satisfying the needs of domestic consumers’ as challenges to moving from balanced and sustainable growth to a higher level.

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It stated in its monthly economic outlook for August 2021 that the risk of the pandemic still exists. The government has followed smart lockdown policies that include restricting indoor activities, which may have some impact on businesses, especially related to other private services.

The ministry also informed the media that the economy is moving on a balanced and sustainable growth trajectory.

The challenge is the elevation of this sustainable growth path to a higher level.

The ministry further stated that this requires extending Pakistan’s production capacity and ensuring that a sufficient proportion of this additional production is exported, besides satisfying the needs of domestic consumers.

It added that enhancing production capacity and increasing its efficiency is impossible without directing a larger proportion of the available and future income towards investments instead of consumption. It believes that the recent geopolitical situation will help Pakistan gain more of a market share through exports.

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An official revealed (on condition of anonymity) that because the government has increased reliance on the import of sugar, wheat, crude oil, and other essential commodities, along with a considerable slide in the rupee against the dollar, there will be serious repercussions on inflation and the current account.

The ministry also revealed that there had been a decline of 30.1 percent in the Foreign Direct Investment (FDI) during the last fiscal year (2020-21) as compared to a year before, besides an upsurge in international food prices amid coronavirus pandemic as one of the factors for the increase in inflation in the country because there was 44.4 percent increase the price of sugar, a 52.2 percent increase in the price of palm oil, a 78.8 percent increase in the price of soybean, and 18 percent increase in the price of wheat in the global market during the last one year.


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The Ministry of Finance quoted the World Bank pink sheet and stated that the price of sugar in the international market has increased from $270 metric tons in July 2020 to $390 metric tons in July 2021, reflecting an increase of 44.4 percent; the price of palm oil from $694 metric tons in July 2020 to $1057 metric tons in July 2021, showing an increase of 52.3 percent.

Likewise, the ministry stated that the price of wheat has increased from $212.7 MT in July 2020 to $250.9 MT in July 2021 after an increase of 18 percent, and soybean price from $821 MT in July 2021 to $1468 MT, reflecting an increase of 78.8 percent.

As per the economic update, Pakistan is the net importer of key food items like wheat, sugar, edible oil, and pulses, and the current upsurge in the international prices of food during the pandemic makes it imperative to build the strategic reserves of essential commodities to stabilize the prices of items of daily use.

The Ministry of Finance warned of potential risks to Pakistan’s economy and stated that an increase in international commodity prices could pressure a country’s domestic inflation and the Balance of Payments (BoPs).

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It warned that “an increase in international commodity prices can build pressure on domestic inflation as well as on the Balance of Payments,” and added that the government measures to build strategic reserves, particularly related to food and initiatives to enhance exports, will surely mitigate the associated risks.


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Furthermore, the recent geopolitical situation will help Pakistan grab more market share through exports.

With the revival of economic activities and an accelerated vaccination process, there are strong expectations about economic growth in FY2022.

Inflation: Pakistan’s inflation rate is driven mainly by current and previous fiscal and monetary policies, international commodity prices, USD exchange rates, seasonal factors, and economic agents’ expectations about the future developments of these indicators. Also, government structural policies to improve the functioning of markets and the food markets particularly play an important role. The year-on-year (YoY) inflation rate has been on a declining trend in recent months. It is expected that, in the absence of any major unexpected inflationary shocks, the inflation may stabilize in August before resuming its downward trend in the coming months.

If no new inflationary impulses occur in August, the YoY inflation will decelerate from 8.4 percent in July to around 7.7 percent in August. The month-on-month (MoM) inflationary impulses in August may come from the second-round effects of the previous increases in international commodity prices from increases in administrated energy prices and currency depreciation.

The government’s efforts to increase the efficiency of domestic food markets are still in place and are continuously being monitored and strengthened. Thus, all in all, the YoY inflation in August is expected to fluctuate around the level attained in July within a range of 7.6–9.2 percent.

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Agriculture: The availability of inputs is satisfactory and it is expected that the agriculture sector will continue to perform better on account of the government’s continued support of the sector. The government has prioritized agriculture as the mainstay of economic growth due to its linkages with employment, trade, and food security. Therefore, it has taken steps to supply improved seeds and fertilizer, while enhancing agriculture credit for mechanized farming, agro-based industries, and cold chains & storage facilities.


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It has been proposed that a network of agri-malls should be spread across the country to minimize the role of the middle man. An additional amount of Rs. 25 billion is being allocated for the development of the agriculture sector. Thus, the agriculture sector is expected to perform well in the absence of climate shocks.

Industrial activity: Measured by the LSM index industrial activity is the sector that is most exposed to external conditions like the developments in international markets. Since March 2021, the LSM index recorded double-digit YoY growth numbers. It is expected that the trend will continue in July FY2022 as well. These staggering high growth rates of the LSM output reflect low base effects and the strong momentum of the current economic expansion.

The Monthly Economic Indicator (MEI) is based on a combination of monthly data of indicators that are proven to be correlated with the GDP at constant prices. Some of the data underlying the July MEI are still provisional and may be revised next month. In May 2021, the PBS published 3.9 percent as the official projected economic growth rate for FY2021 based on nine months. The strong acceleration of the MEI during the last quarter of 2021, indicates that the annual GDP growth in FY2021 may exceed the provisional figure released by the PBS.

Since March 2021, the MEI has been fluctuating at a significantly higher level as compared to the previous months of FY2021. This steep increase in the MEI during the last months of 2021 reflects the extraordinary strong acceleration in the growth of the LSM on a YoY basis (which is known to exert significant multiplier effects on important segments of the services sector). Furthermore, the rebound in imports is another indicator of strong expansion in economic activity.


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In July 2021, the MEI showed continued strong growth driven by several factors. First was an expected continued strong YoY growth of the LSM in July. Furthermore, as observed in July, was a continued cyclical uptrend in the main trading partners, continued strong growth in imports, and deceleration of inflation.

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According to the Balance of Payments (BoP) data, the imports of goods and services had spiked in June 2021 but had returned to normal levels in July 2021. Usually, both June and July but June, in particular, are characterized by positive seasonal effects. This positive seasonal impulse is expected to disappear in August. On the other hand, other factors such as the recent increases in international oil prices and the ongoing revival of economic growth may stimulate imports. It is expected that the imports of goods and services will settle at around $6 billion in August 2021. Contrary to the imports, the exports of goods and services usually experience negative seasonality from June through September according to the BoP data.

The moderation of this seasonal effect, together with 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 guide the exports of goods and services towards the $3 billion in August and beyond it in subsequent months.

It is expected that the trade deficit in goods and services could be stabilized to approximately $3 billion in August with the expectations for remittances to be stabilized around $2.5 billion, and taking into account the other secondary income and primary income flows, the current account will remain in deficit at moderate monthly levels of around $0.5 billion in the upcoming month.

These expectations depend on the absence of any unexpected negative shocks that may be generated by the potential retardation of the economic revival abroad (due to the loss of confidence, inflation fears, uncertainty about the tapering of monetary accommodation, and geopolitical risks, etc.). An international and domestic upsurge in COVID-19 infections continues to remain an important risk factor.

Fiscal: The fiscal consolidation efforts remained on track during FY2021. The successful consolidation was achieved on the back of prudent expenditure management and revenue mobilization efforts. The fiscal deficit is expected to reduce even further for FY2022.

The tax revenue increased by 18.4 percent in FY2021 whereas tax collection climbed up by 42.5 percent in July FY2022, indicating a good start to the new fiscal year. For FY2022, the tax collection is expected to reach Rs. 5,829 billion. To achieve the target, the government is pursuing a comprehensive tax policy that focuses on expanding the tax base by identifying new taxpayers while gradually eliminating exemptions and concessionary provisions and lowering tax rates.


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These achievements in the fiscal sector are important, especially when Pakistan, like the whole world, is constantly battling the resurgence of COVID-19. The persistence in the consolidation efforts will pave the way for the creation of a fiscal space that will enable the government to withstand untoward situations.

Way Forward: Recent developments in Pakistan’s macroeconomic indicators are positive. In the absence of major unexpected negative shocks, the economy is moving on a balanced and sustainable growth path. However, the challenge to elevate this sustainable growth path to a higher level remains.

This requires extending Pakistan’s production capacity and ensuring that a sufficient proportion of this additional production is exported, besides satisfying the needs of domestic consumers. Enhancing production capacity and increasing its efficiency is not possible without directing a larger proportion of the available and future income towards investments instead of consumption.

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