The economic prosperity has improved by 1.5 percent in Pakistan during the period from November 2020 to October 2021 with an improvement in the country’s overall economic performance, according to the latest survey conducted by the Policy Research Institute of Market Economy (PRIME).
The improvement in the overall economic performance can be attributed to higher business activity on the back of rising domestic and international demand for goods and services, a decline in supply chain distortions, and a return to normalcy.
The report reveals that the trade volume witnessed an increase of Rs. 538 billion year-on-year (YoY) and Rs. 3.8 billion month-on-month (MoM) on account of an increase in domestic and international demand. In MoM trade growth, exports witnessed an increase of Rs. 19 billion, while imports witnessed a decline of Rs. 15 billion in October 2021.
The purchasing power continued to decline as the YoY inflation was reported at 9.2 percent, while the MoM inflation clocked at 1.9 percent. The prevalent high levels of inflation are due to the soaring supply-demand gap emanating from monetary expansion carried out through commercial banks’ investment in government securities, a higher inflow of remittances, falling productivity, and surging petroleum prices.
The Large Scale Manufacturing (LSM) output posted a growth of 1.9 percent MoM, while a decline of 1.2 percent YoY. The slowdown in manufacturing activities on yearly basis is due to a significant increase in the energy and input prices while the monthly increase is associated with rising demand. The automobile industry maintains a leading position with a growth of 1.2 percent, while textile and food industries having weightage of 21 percent and 12 percent showed growth of 0.1 percent and 0.4 percent.
The private sector borrowing from banks has been on an upward trajectory with Rs. 197 billion YoY and Rs. 19 billion MoM increase. The borrowing continues to increase despite a slight hike of 25 basis points in the policy rate and the indication of a further hike in the coming months. However, the borrowing is likely to slow down after recent hikes in the policy rate.
As per the report, the economic performance is encouraging but caution is needed due to prevalent challenges. The burgeoning current account deficit on the back of a significant increase in the international commodity and energy prices and the resultant hike in the policy rate will contribute to a slowdown in the economic activities in the country. This is a cardinal factor in the yearly decline in manufacturing sector output.
The surging global energy prices, says the report, translates into domestic inflation thus declining the purchasing power/real incomes of the citizens and hindering the economic activity. Instead of relying on administrative measures to control prices, addressing the supply side bottlenecks such as lower productivity and interruption in the supply of energy are imperative to lower inflation, especially food inflation, which is the main cause of rising overall inflation in the economy.
The overall economic outlook, as measured by PPI, shows improvement and supports the government’s growth targets. The supply-side shocks call for more liberal trade measures and the elimination of state intervention in the market. Moreover, prudent economic planning is needed to curtail the fiscal deficit.
PRIME publishes monthly PPI report with a lag of two months. The report covers trade volume, lending to the private sector, purchasing power, and manufacturing output indices.
