‘Balancing external sector major challenge to economy’

ISLAMABAD: Following a staggering 829.1 percent surge in current account deficit against an envisaged target, the Ministry of Planning Development & Special Initiatives has conceded that balancing external sector amid deteriorating globally inflationary environment is a major challenge to economy

Contrary to the government’s hanging the runaway inflation only on skyrocketing international commodity and fuel prices and deliberately playing down the impact of rupee devaluation, planning ministry in a report clearly stated, “inflationary pressures during 1HFY22 remained elevated due to a combination of factors related to sharply rising international energy & commodity prices and unfavorable exchange rate adjustments”.

The current account deficit (CAD) had now surged further and stood at $11.5 billion for the first seven months (July-Jan) of the current fiscal year, while it soared to $2.6 billion in January 2022 when there were expectations the CAD would start receding after the announcement of mini-budget for ending uncertainty on economic and fiscal fronts.

In its Mid-Year Economic Review, Ministry of Planning on Friday pointed out the persistent structural issues being faced by the country’s economy, which many be termed as ‘boom and bust’ cycles.

The review states this broad-based improvement in economic performance was indicative of building on the V-shaped growth recovery achieved during FY21.

“However, the tenuous spillover between growth acceleration and the external sector vulnerabilities once again surfaced during 1HFY22. The structural characteristics of the balance of payments constrained growth along with a global surge in commodity prices manifested in the highest ever import surge in December 2021,” it added.

According to the review, these developments led to recent fiscal and monetary policy responses aimed at rebalancing growth in aggregate demand with the external sector sustainability.

Dwelling upon the outlook for second half of the financial year 2022, the report states with the resumption of the International Monetary Fund (IMF) programme, the economic outlook for the remaining months of FY22 was expected to result in an orderly rebalancing between imperatives of economic growth and addressing the external sector vulnerabilities; particularly in the light of the extent of global slowdown arising from the spread of new Covid variant, Omicron, and the expected abatement of global inflation in commodity prices and the stability of exchange rate movements.

On the positive side Pakistan’s 50 percent adult population is fully vaccinated and this coverage provides a basis for wider immunity to the population.

Moreover, recent fiscal adjustment efforts through supplementary monetary bill are likely to weigh on the containment of rising growth in aggregate demand.

Despite considerable international geopolitical downside risks and emerging commodities’ supercycle phenomenon, it is expected it will reach around the original National Economic Council (NEC) growth target of 4.8 percent for FY22.

The industrial sector may witness slight slippage against the target but the Services sector is likely to surpass the target. The previous inflation projection will be exceeded by a fair margin.

However, the targets set for the external sector will be partially achieved, with the import targets likely to be breached by a good margin, leading to higher than projected deficits in current and trade accounts.

Fiscal developments are also reliant on fiscal measures proposed in the recently introduced supplementary money bill in Parliament. Based upon the developments in the 2HFY22, staying close to this fiscal year’s overall fiscal deficit target is likely to be challenged by the additional cost of Covid vaccines and social protection.

The agriculture sector is expected to achieve the envisaged full-year growth target of 3.5 percent, keeping in view the impressive performance of Kharif crops and prospects of good wheat crop.

However, agriculture growth is contingent upon the availability of certified seed and pesticides during the Rabi season, while consistent availability of water and agriculture credit facilities will also help achieve targeted growth. The industry sector was projected to grow by 6.5 percent based upon large-scale manufacturing (LSM) target of 6 percent. However, with the revised full-year number of LSM for FY22, meeting the targeted 6 percent growth is now unlikely. Also, high cost and low supplies of energy inputs is another challenge for the manufacturing sector.

Construction sector is seen posting healthy growth due to the construction amnesty scheme and concessional credit availability for the housing sector.

The services sector growth is mostly reliant upon the performance of commodity-producing sectors and imports. The expected revival in the commodity-producing sector and higher-than-anticipated growth in imports will push this sector’s growth upward. Higher financial intermediation, and 38 percent growth in IT-related services will also provide an additional boost to the social and community services sector.

“On fiscal and external account, slippages are expected as pressures on imports will only gradually moderate and notwithstanding stellar revenue efforts on the taxation side, expenditure side will remain under pressure to finance the delivery of social sector services and vaccination rollout programmes,” the Mid-Year Economic Review concluded.