ISLAMABAD: The government has pointed to various economic factors as well as “increasing economic and political uncertainty” responsible for the rise in fuel prices in the country amid expectations of a further rise in already high inflation in the coming months. Is.
The Finance Ministry said in its monthly economic report for March 2023 released on Friday that “[…] political and economic uncertainty is another possible reason for the rise in prices.
In addition, inflation remains high due to market frictions due to relative differences in demand and supply of essential commodities, exchange rate depreciation, and recent upward adjustment in the administered prices of petrol and diesel. is expected.
“Due to the after-effects of the floods, production losses, especially in major crops, have not yet been fully recovered. As a result, shortages of essential commodities have developed and persisted. The second-round effect resulted in further inflation. may increase,” he added.
There are expectations that CPI-based inflation is approaching the 35% mark for March 2023, due to be released today (Saturday), up from 31.5% for February 2023.
The Monetary Policy Committee (MPC) is scheduled to meet on April 4, 2023, which is likely to increase the policy rate from 20% to 22-23%.
Despite the challenges and uncertainties, the finance ministry report said the economy continues to show signs of resilience as shown by fiscal and current account deficits during the current fiscal year.
Additionally, Pakistan currently faces a shortage of external liquidity. Through demand management policies, the government is trying to limit the current account deficit, which will not put further pressure on dwindling reserves,” it said.
Additionally, the government is strongly inclined to complete the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) programme, which includes necessary policy measures and will bring additional relief to the balance of payments fiscal account. Policy measures are aimed at bringing expenditure in line with the income generated within the country.
On the fiscal front, the government is pursuing fiscal consolidation to reduce the overall fiscal deficit through expenditure management, austerity measures and revenue mobilisation.
The economic downturn resulting from the delay in the stabilization program has added to economic uncertainty, leading to strong inflationary expectations, the report said.
Despite the tightening monetary policy of the State Bank of Pakistan (SBP), inflation expectations are not easing.
Additionally, bulk purchases during Ramadan may create a gap between supply and demand and consequently increase the prices of essential commodities. However, the government is well aware of this and has already roped in all provincial governments to ensure smooth supply of essential commodities.
Inflation in March may remain in the upper range as seen in February. Recent monetary policy tightening and financial stabilization efforts coupled with administrative, policy and support measures are expected to ease inflationary pressures by the end of the current fiscal year.
The average MEI during the first eight months of the current fiscal year indicates a further slowdown in domestic economic activity. This appears to be due to lack of industrial dynamism, rising inflation, which erodes the purchasing power of consumers and investors and is also reflected in negative growth in exports and imports.
According to BOP data, the trade deficit in goods and services has narrowed significantly by 30.8 percent on an annual basis. From $2.6 billion in February 2022 to $1.8 billion in February 2023. However, on a MoM basis, it rose marginally to $1.8 billion as against $1.7 billion in January. Exports of goods and services eased marginally to $2.77 billion from $2.8 billion in January. On a year-on-year basis, it declined by 19.2 percent. Includes imports of goods and services and has declined by 24.2% on an annual basis.
Remittances rose 5.0% on a MoM basis to $2.0 billion in February 2023 compared to $1.9 billion in January 2023, due to improved conditions after narrowing the gap between the interbank and open markets, after Adjustments in exchange rates were now allowed. Another factor that primarily contributed to the improvement in the current account for February is the balance on core income, which is $200 million.
Accordingly, the current account deficit stands at $74 million as against $230 million in January 2023. For March, exports and imports are expected to remain at current levels due to slower growth in major trading partners and containment of domestic economic activity.
However, remittances will improve further due to positive seasonal and Ramadan factors. Considering these factors as well as other components, the current account deficit is likely to remain on the lower side.
The government is pursuing fiscal consolidation to reduce the overall fiscal deficit through a combination of expenditure management and revenue growth. These initiatives are paying off in the form of better financial accounts. Fiscal deficit has narrowed to 2.3% of GDP during July-January FY2023, down from 2.8% of GDP in the same period last year, while the primary balance is in surplus due to significant reduction in non-markup expenditure.
On the revenue side, the tax collection of the Federal Board of Revenue (FBR) is currently growing at 18 percent despite unprecedented challenges due to slowdown in economic activity and import pressure. However, the current performance indicates the government’s commitment to improve revenue collection and achieve the full-year target.
Fiscal consolidation is at the top of the government’s consolidation agenda to tackle the large fiscal deficit. With prudent expenditure management and an effective resource mobilization strategy, FY 2023 is expected to witness a substantial reduction in the overall fiscal deficit as a percentage of GDP.
