Inflation up, exports and investment down

ISLAMABAD: The Ministry of Finance Friday conceded that the international commodity prices were recently on a rising trend, especially oil and food prices, so inflation for the next month may remain between 5.5 and 7.5 per cent, higher than the last month level of 5.7 per cent for January 2021.

“International commodity prices are recently on a rising trend, especially oil and food prices. Furthermore, around the same period one year ago, the commodity prices were low and the CPI level actually declined.

“Taking all these observations into account, the year on year (YoY) inflation for the next month may remain between 5.5 7.5 per cent,” said the economic update for February 2021 released by the Ministry of Finance on Friday.

Dwelling upon on the way forward, the Ministry of Finance states that the government’s timely measures against the COVID-19 pandemic in terms of fiscal stimulus, easing mobility restrictions, timely arrangement of vaccination, together with accommodative monetary policy allowed economic activities to continue in the difficult time.

Thus, it is observed that the overall economic recovery is on its way and may accelerate in the coming months. Especially, industrial sectors have started showing a robust growth. “The timely measures of the government are supportive in spurring the economic growth, decelerating inflation and at the same time preserving external balance,” it noted.

The Consumer Price Index (CPI) inflation decelerated to 5.7 per cent on the YoY basis during the month of January 2021 after touching a high of over 14 per cent last year. On the MoM basis, it decreased by 0.2 per cent in January 2021 as compared to a decrease of 0.7 per cent in December 2020 while it was increased by 2.0 per cent in January 2020.

The decrease in the prices of vegetables, fruits, eggs, etc tamed the CPI inflation. The average inflation rate from July-January 2021 was recorded at 8.2 per cent against 11.6 per cent over the same period last year. Recent developments in inflation show that both the YoY and MoM inflation is on a negative trend in recent months. Recently, the government implemented policy measures to improve the market mechanism of food commodities and reinforce the supply chain of essential food items. These interventions were successful to prevent uptick in prices of daily use items. It is expected that due to much-needed structural measures, the downward trend of prices of these items will be permanent. In that case, the downward shift in the CPI level will induce derived effects such as lower indexations of other prices and wages, lower production costs, lower inflation expectations, etc.

“These second-round effects are mutually reinforcing and therefore not only the CPI level but also the future inflation rate may follow a lower path than what would otherwise have been if these policy measures were not taken,” the Ministry of Finance noted.

The production of wheat crop is expected to be better as compared to last year due to more area under cultivation as per preliminary estimates which recorded area sown at 9.2 million hectares against 8.8 million hectares last year. Timely rain spells, favourable weather conditions and better farm management practices will pave the way to achieve the wheat production target. The agriculture input situation is favourable.

According to the Pakistan Automotive and Manufacturing Association (PAMA), farm tractors production and sales rose by 54.7 per cent and 54.6 per cent respectively during July-January 2021. As per IRSA estimates, the irrigation water supply during January 2021 was 2.43 MAF against the last year’s supply of 1.72 MAF, higher by 0.71 MAF (41.27 per cent). During July-January 2021, the banks have disbursed agriculture credit amounting to Rs715.6 billion, 1.8 per cent higher than the disbursement of Rs702.9 billion made during same period last year.

During the current Rabi season 2020-21 (Oct-Dec), urea off-take was recorded at 1,827 thousand tonnes which decreased by 1.1 per cent while DAP off-take was 791 thousand tonnes, showing a decrease of 8.9 per cent over the same period last season. One of the reasons of low off-take during Rabi 2020-21 is unexpected high off-take of DAP during the month of August (180 per cent) and September (9 per cent) in Kharif 2020. The Large Scale Manufacturing (LSM) has surpassed its pre-COVID level of production in Dec 2021, witnessing 11.4 per cent growth on the YoY basis (10.5 per cent in Dec 2020) while on the MoM basis, LSM increased by 13.5 per cent in Dec 2021 (1.3 per cent in Nov 2021).

During Jul-Dec 2021, LSM grew by 8.2 per cent (-2.7 per cent last year). In Dec 2021, on the MoM basis, 10 out of 15 subsectors have posted positive growth. Textile, food beverages and tobacco, non-metallic mineral products, iron and steel products, coke and petroleum products and pharmaceuticals grew by 0.63, 64.08, 3.11, 8.31, 11.52 and 2.5 per cent, respectively. Car production and sale increased by 4.9 and 17.9 per cent respectively during Jul-Jan 2021 while the tractor production and sale increased by 54.7 and 54.6 per cent respectively.

The NEPRA has approved a support package for additional electricity consumption for industrial consumers of DISCOs and K-Electric. Impetus has been given to export-oriented industries by fixing power price at $ 0.07/unit and gas tariff at $ 0.065/mmbtu. The government has extended tax amnesty till Jun 2021 and fixed tax regime till Dec 2021.

The fiscal deficit has been contained at 2.5 per cent of GDP in the first half of the current fiscal year against 2.3 per cent of GDP recorded last year. In contrast, the primary balance posted a surplus of Rs337.2 billion in the first half of FY 2021 as compared to Rs286.5 billion last year. Tax revenues grew by 6.4 per cent to Rs2455.9 billion during Jul-Dec 2021 (Rs2307.8 billion last year). On the other hand, non-tax revenues stood at Rs895.3 billion during Jul-Dec 2021 (Rs924.1 billion last year). Overall total revenues grew by 3.7 per cent to Rs3351.2 billion in the first half of FY 2021 (Rs3231.9 billion last year).

During Jul-Dec 2021, total expenditures increased by 6.2 per cent to Rs4489.1 billion (Rs4226.6 billion last year). The Money Supply (M2) increased by Rs732.2 billion (Rs685.1 billion last year). Within Money Supply, Net Foreign Assets (NFA) of the banking system witnessed expansion of Rs583.2 billion (Rs1,100.4 billion last year).

On the other hand, Net Domestic Assets (NDA) increased by Rs148.9 billion (contraction of Rs415.3 billion last year). Private sector credit has seen an expansion of Rs291.9 billion (Rs179.2 billion last year). Within loans to private sector business, demand for working capital loans has seen expansion of Rs39.8 billion during Jul-Jan, 2021 compared to Rs63.8 billion last year. Fixed investment loans increased by Rs110.9 billion against retirement of Rs5.6 billion last year.

The Current Account posted a surplus of $0.9 billion (0.6 per cent of GDP) for Jul-Jan 2021. In Jan 2021, the current account deficit remained $229 million due to imports of essential food items, capital goods, oil and industrial raw material owing to the domestic economic recovery. As per PBS, exports during Jul-Jan 2021 increased by 5.6 per cent to $14.3 billion ($ 13.5 billion last year). Pakistan’s exports grew by 8.8 per cent ($ 2.1 billion) in Jan 2021 ($1.9 billion last year). The textile sector exports increased by 8.2 per cent over the last year. Value-added exports increased by 13.4 per cent. The decrease in quantities of value-added exports was compensated by higher unit price. The total imports in Jul-Jan 2021 increased to $29.3 billion ($ 27.3 billion last year), thus growing by 7.2 per cent. The petroleum group decreased by 20.9 per cent while import of petroleum crude decreased by 26 per cent in value and increased by 14.7 per cent in quantity. Import of petroleum product increased by 43.2 per cent (quantity) and decreased by 15.3 per cent (value). The food group import jumped by 51.9 per cent during Jul-Jan 2021 and reached $4.6 billion ($3.0 billion last year). The government allowed import of wheat and sugar to bridge local shortages.

Foreign Investment: In Jul-Jan 2021, FDI reached $1145.3 million ($1,577.0 million last year) while on YOY, FDI recorded at $192.7 million in Jan 2021 ($219.6 million last year).

Workers’ remittances: During Jul-Jan 2021, remittances rose to $16.5 billion ($13.3 billion last year), posting a growth of 24.1 per cent. On the YoY basis, remittances reached $2.3 billion, showing an increase of 19.2 per cent in Jan 2021 ($1.9 billion in Jan 2020). Workers’ remittances remained above $2 billion for the eighth consecutive month in Jan 2021. The major sources of remittances are Saudi Arabia, UAE, USA and UK.

Pakistan’s total liquid foreign exchange reserves increased to $20.2 billion by the end of Jan 2021. The breakup of reserves accumulation shows that the SBP’s reserves stood at $13.0 billion ($12.3 billion last year) and $7.1 billion ($6.4 billion last year) in commercial banks’ reserves. Prospects of economic growth are showing visible signs of improvement during Jul-Jan 2021, which strengthens expectations about economic recovery.

The Monthly Economic Indicator (MEI) is based on combining monthly data of indicators that are proven to be correlated with GDP at constant prices. Based on available data, the MEI shows continued strong growth in January, in continuation with what was observed in the previous seven months. It follows that economic growth has been strong throughout the first half of the current fiscal year and will continue to show improvement in the second half of the current fiscal year.

After a very strong MoM increase in Dec 2020, partly due to seasonal effects, imports came back to the normal levels in Jan 2021, resulting in a MoM improvement in the trade balance. Although they remain supported by the ongoing economic recovery and further increases in international commodity prices, imports in Feb 2021 are expected to remain lower or at around the same level observed in Jan 2021. As a consequence, in the baseline scenario, the trade balance is expected to show further improvement as compared to the two previous months. Regarding remittance inflows, these remained strong and still expected to provide support to finance trade deficit.

The resurgence of the COVID-19 infection placed considerable strain on the fiscal side of the economy during the first half of the current fiscal year. Despite significant challenges, the revenues side performed better on the back of improved tax collection both at the federal and provincial level. The performance is an indication of growing economic activity even in the wake of challenges posed by the second wave of the pandemic. This implies that, as economic activity accelerates further, there would be more increase in revenues. On the other hand, the expenditure side is expected to remain under pressure due to COVID-related expenditures.

Meanwhile, the Oil and Gas Regulatory Authority (Ogra) Friday forwarded a summary to the Petroleum Division suggesting a massive increase in prices of petroleum products from March, sources told Geo News.

According to sources, Ogra has recommended an increase in the price of petrol by Rs20.7 and an increase in the price of diesel by Rs6 per litre. The current levy on petrol stands at Rs17.97 per litre.

Likewise, the levy on diesel stands at Rs18.36 per litre. According to sources, the final decision on an increase in petroleum products will be taken by the Ministry of Finance in consultation with the prime minister.