Finance Ministry’s Monthly Outlook Paints a Positive Picture of Economic Recovery

Pakistan’s economic recovery is expected to continue at an accelerated pace, according to the monthly ‘Update and Outlook’ for October 2021 released by the Finance Ministry on Thursday.

The report says that the performance of various economic indicators shows that the recovery has been accelerating since March. The increased production is likely to boost exports while domestic production may partially substitute imported products and increased incomes generated by economic growth would raise product demand.

“Increased production also stimulates exports, while the supply-side induced increase in domestic production may partially substitute imported products. On the other hand, the need for necessary intermediate inputs in the production process also increases. The increased incomes generated by economic growth also raises the demand for domestic and foreign products,” reads the report.

It states that measures are being taken to curb unnecessary imports, as they “do not contribute to the expansion of domestic production”. Nevertheless, the economic expansion may go along with a current account deficit, it says, adding that it is normally recognized that emerging and developing countries run current account deficits, financed by financial inflows from developed nations.

It has strongly been realized, the report reveals, that as long as deficits are manageable, their contribution remains productive for achieving a higher and sustainable growth trajectory, necessary for the convergence of per capita income with developed countries.

According to the report, by the end of the first two months (July and August) of the fiscal year 2021-22, the fiscal deficit was almost at the same level as it was in the same period last year. It says the government is following a careful expenditure management strategy to ensure that critical areas are not ignored and that sufficient resources are made available for growth-oriented and social security-related programs. It has been affirmed that these measures would pave the way for better financial prospects and sustained economic recovery.

On the revenue side, the Federal Board of Revenue (FBR) is focused on sustaining its successful streak of surpassing the tax collection target during the first quarter of FY2022 and it has already taken a number of initiatives in this regard.

According to the report, the FBR is implementing digitalization and automation of various processes involved in revenue collection. The launch of point-of-sale and track and trace systems are examples of such initiatives. Furthermore, FBR also seeks to promote economic activities through maximum taxpayer facilitation. The FBR is achieving the revenue target set for FY2022.

The Ministry’s report reveals that on the external side, imports of goods and services in September were marginally lower than their levels in August. It shows that the persistent rise in international oil prices, exchange rate pressure, and the rise in domestic economic activities are contributing to rising import demand.

Given these recent dynamics, it can be expected that in the following months, imports may remain at their current high levels. It states that the recent government steps in terms of monetary policy and the measures taken to discourage unnecessary imports will be helpful in containing the strong expansion recorded in recent months.

The Finance Ministry report underlines that the exports of goods and services, as expected, crossed the $3 billion mark, helped by the ongoing strong recovery in Pakistan’s main export markets, the momentum in domestic economic dynamism, and specific government policies to stimulate exports. These dynamics are expected to keep exports above the $3 billion mark in the months ahead, says that report. It adds that the trade deficit of goods and services retreated from the level observed previously is expected to first stabilize and then decline in the months ahead.

The Ministry expresses hope that if remittances stay roughly at current levels in the coming months, the current account deficit, taking into account the other income inflows having a relatively minor share, would be driven by the trade deficit which would be stabilized and improved. However, these developments will be closely monitored.

The report declares that the inflation rate is mainly driven by monetary and supply-side factors, i.e., domestic and international commodity prices, US dollar exchange rate, seasonal factors, economic agents’ expectations concerning the future developments of these indicators, government’s structural policies to improve the functioning of market structure particularly the food markets. Since May 2021, year-on-year inflation has observed a downward trend till September 2021.

The effect of various impulses may intensify the magnitude of prices and transportation costs. It has been asserted that traditionally the month of October shows positive seasonality, and the government is also committed to ensuring the smooth supply of essential commodities in domestic food markets to protect the livelihood of the people. If there are no additional impulses in October, the YoY inflation will decelerate.

The preliminary production estimates of major Kharif Crops 2021, the report said, were encouraging while the availability of inputs would remain satisfactory as more certified seeds for wheat and other crops would be ensured for the upcoming Rabi 2021-22 season. Thus, it is expected in the report that in the absence of any adverse climate shock, the agriculture sector would surpass its target of 3.5%.