Inflation, external pressures to retard recovery

ISLAMABAD: Country’s finance authorities have launched distress signals as Pakistan’s low growth prospects in the short-term, higher inflation rate, and external sector pressures are creating macroeconomic imbalances that could complicate the economic recovery.

“High inflation and the accompanying monetary policy reaction may temporarily dampen the cyclical position of Pakistan’s economy thereby reducing growth prospects in the short run. But in the long run, Pakistan’s productive capacity will determine its growth as well as employment prospects,” said the Ministry of Finance in its Monthly Economic Update & Outlook released on Friday.

“This requires a substantial upward shift in the propensity to invest and of the productivity of investment expenditures.” Stimulating the propensity to invest implies that a larger share of the income that the country generates is used to finance Gross Fixed Capital Formation, according to the report.

It said structural policies were to be further designed to attract more productive investments from foreign sources (Foreign Direct Investments) and from both private and public domestic investors.

“High international commodity prices not only keep inflation elevated, they are also a burden on Pakistan’s external account and hence on its foreign exchange reserves.”

It says many other countries are facing the consequences of high and volatile commodity prices, especially oil and gas.

The ministry is of the view that strengthening Pakistan's overall supply side through increasing its productive potential would allow it to produce more for exports and to discourage imports.

These prospects would relax the external constraint that has historically weighed on Pakistan’s economy and which has caused regular Balance of Payments crises and an accompanying stop-and-go profile in Pakistan’s economic growth path, the report added.

Following international developments and persistent high domestic inflation were likely to impact domestic economic activities, it said adding, among the determining factors of current trends in both international and domestic inflation were supply chain issues and surging international commodity prices.

“Under normal circumstances, these prices follow a cyclical pattern. That implies that normally, price spikes are followed by a cooling-off period. But the current cycles of international food and oil prices are different. First, the volatility in these markets is high compared to historical standards. Second, due to geo-political tensions, the increasing trend in prices may remain intact.”

The report further said the war between Russia and Ukraine was affecting the global economy through three channels. “First, higher commodity prices are deteriorating the real income. Second, neighbouring countries are grappling with disrupted trade along with an influx of refugees. Third, higher investors’ uncertainty is reducing business confidence.” Consequently, these channels are soaring international commodity prices and downgrading the global output growth by 0.8 percentage points in 2022, the report said and added that both energy and non-energy prices surged in March 2022 by 24.1 and 8.1 percent respectively.

Among key sub-groups, agriculture commodities jumped 7.2 percent, fertilisers 20.7 percent, metals and minerals 7.7 percent, and precious metals 5.3 percent.

The production of all important Kharif crops in Pakistan is encouraging. Cotton production increased 17.7 percent to 8.3 million bales, rice went up by 10.7 percent to 9.3 million tonnes, sugarcane by 9.6 percent to 88.8 million tonnes, and maize crop grew by 8.6 percent to 9.7 million tonnes.

During July-February FY2022, LSM posted a growth of 7.8 percent as compared to 2.2 percent during the same period last year.

The fiscal deficit in July-March FY2022 was recorded at 4.0 percent of GDP. The primary balance posted a deficit of Rs447.2 billion. During July 1-April 1, FY2022 money supply (M2) grew 2.7 percent (Rs665.5 billion) as compared to 6.7 percent (Rs1,439.5 billion) last year.

During July-March FY2022, the current account deficit clocked in at $ 13.2 billion.

Although the economic recovery is underway, still, the domestic and international scenario is changing over the course of time. Thus, inflationary, and external sectors’ risks are building macroeconomic imbalances.

International commodity prices are expected to rise further. The pass-through of the increase in global commodity prices is somewhat contained due to the government measures. Still it is expected that CPI inflation will increase and remain in double digit in April 2022.

The Monthly Economic Indicator (MEI) remains strong, although some slowdown in growth since Feb 2022 is observed. For the last 2 months, growth in economic activity has fluctuated around 4 percent.

Moreover, economic activities in Pakistan’s main trading partners continues to remain slightly above trend, some slowdown has been observed due to geo-political uncertainty and surge in commodity prices. If these tensions continue, Pakistan’s growth may be affected as well.

For April 2022, exports of goods and services are expected to continue their upward trend due to the exports-oriented policies. Imports are expected to remain at the level in line with domestic economic activity and international commodity prices. Resultantly, the trade deficit is expected to remain around $ 3.0 billion in April. Remittances are expected to remain high as compared to previous months due to the Eid factor. Taking these factors into account, the current account will stay around $1 billion in April.

During the first nine months of the current fiscal year, the Federal Board of Revenue (FBR) exceeded its revenue target by 5.8 percent. Despite massive tax relief on various essential items to the common man, FBR has been able to achieve a sizable portion of its annual target. Similarly, various policy and operational measures have been initiated to maximise revenue potential through digitisation, transparency, and taxpayer facilitation.

All these efforts have not only ensured the ease of doing business but also translated into healthy and steady revenue growth. Geo-political tensions and persistent high domestic inflation may impact domestic economic activities. The high inflation accompanying monetary policy reaction may temporarily reduce growth prospects in the short run. But in the long-run, economic growth and employment are determined by the path of Pakistan’s productive capacity. This requires more productive investments from both foreign and domestic sources, the report concluded.