Economic Outlook Surrounded by Global and Domestic Uncertainties: Finance Ministry

The Finance Ministry has said that the economic outlook of the country is surrounded by global and domestic uncertainties.

The Finance Ministry issued Monthly Economic Update & Outlook Aug 2022 here on Thursday. The monthly economic updates say, “Economic outlook is surrounded by global and domestic uncertainties. Geopolitical tensions remain unabated, worldwide inflation remains high, interest rates show tendencies to rise, and the US dollar strengthens. Pakistan’s external environment is therefore facing increasing challenges”.

On the domestic side, the government has taken necessary measures to comply with International Monetary Fund (IMF) requirements. These have further increased inflation; however, they will have a positive effect, alleviating the external financing constraints.

The CPI inflation for the month of July 2022 is recorded at 24.9 percent as compared to 8.4 percent during the same month of the last year. This is the second consecutive month in which YoY inflation escalated above 20 percent, however.

YoY and MoM inflation have been accelerating drastically in June and July. The main drivers were seen to be the pass-through of high international commodity prices and exchange rate depreciation into domestic retail prices.

On the other hand, during the last 12 months, money supply growth was compatible with a low and stable inflation rate. But the recent supply shocks have brought the CPI to a level much higher than the previous year. Considering the fact, that the domestic retail prices may further increase in August 2022 compared to July 2022, even if there is no further MoM increase in August 2022, YoY inflation will settle at nearly the same level as the one observed in July 2022.

Inflation has continued to accelerate in recent months, mainly due to supply shocks that have created very significant monthly impulses on the CPI level. If these monthly impulses can be contained to more normal levels in future months, inflation may start to decelerate. But even then, YoY inflation may stay in double-digit for the rest of the current FY.

Furthermore, Pakistan’s Normal Effective Exchange Rate Index (NEER) has significantly depreciated in recent months, and its Real Effective Exchange Rate (REER) appreciated again in June.

The current account deficit (CAD) was posted as $1.2 billion for July FY2023 as against a deficit of $851 million last year, mainly due to a decline in workers’ remittances owing to seasonality. However, the current account deficit shrank to $ 1.5 billion in July 2022 as against $2.2 billion in June 2022, largely reflecting a sharp decline in energy imports and continued moderation in other imports.

The trade balance on goods and services improved considerably in July as compared to June and is expected to continue improving in the coming months.

The remittances are expected to hold around $3 billion in the coming month. Considering the expected trajectory of the balance on goods and services, as well as all other components, the current account balance may gradually move into the direction of equilibrium in the coming months.

The new agreement with the IMF ensures that Pakistan’s external financing needs will be met. This opens room for further implementation of supply-side policies that should elevate Pakistan’s potential growth rate to a higher sustainable level, says the report.