ISLAMABAD: The Finance Ministry in its monthly economic update report released on Saturday admitted that Pakistan’s economy still faces significant challenges characterized by rising inflation and slowdown in economic activity.
The ministry expects CPI-based inflation to hover around 36-38 percent for April. In its monthly economic outlook for April 2023, the finance ministry said headline inflation (CPI) is expected to remain elevated in the coming months. Its main drivers are rising food and energy prices. Additionally, currency devaluation and administered price hikes have contributed to increasing the overall price level. Although global commodity prices are showing a downward trend, they are still on the high side compared to pre-pandemic levels.
Slow recovery from flood damage has exacerbated inflation as supplies of essential crops fall short of domestic needs. Although, the SBP is making a contractionary monetary policy, inflationary expectations are not going away. Inflation is expected to be in the range of 36-38 percent for April. The federal government, in coordination with the provincial governments, is closely monitoring the supply-demand gap for essential commodities.
Taking necessary measures to reduce inflationary pressure.
According to the report, Pakistan’s economy still faces significant challenges characterized by high inflation and sluggish economic activity. Nevertheless, there are some positive signs as a result of the government’s stabilization policies.
For example, the BOP’s current account turned into a surplus.
This can improve the external financial barrier, contribute to further stability of the exchange rate, and promote confidence in the economy. The Finance Ministry hopes that “Furthermore, successful completion of the IMF program will pave the way for attracting more capital inflows, further stabilizing the exchange rate and reducing inflationary pressures.”
Availability of information on seeds, agricultural credit and fertilizers will remain satisfactory during Kharif 2023.
The Pakistan Meteorological Department (PMD) said slightly above normal rainfall is expected in the next three months (April-June 2023), especially in the upper parts of the country. Less rain is expected in the month of June. Temperatures may remain slightly above normal in most parts of the country. A gradual increase in temperature will accelerate the melting of snow in the northern regions. Monsoon rains can provide water for crops in the main rainfed areas, while the lower parts of the country will be water-scarce during the kharif season.
Industrial activity, measured by the LSM index, is the sector most affected by external conditions. Its cyclical pattern is positively correlated with the cyclical position of Pakistan’s major trading partners.
Since the beginning of the current financial year, LSM activity has been recorded below its natural capacity level. The same observation applies to Pakistan’s cyclical position in key export markets. The cyclical recession in Pakistan’s manufacturing output also increased due to policy measures necessary to address macroeconomic imbalances.
In recent months, LSM production has been well below its potential, but there appears to be some bottoming out. This is also reflected in the seasonally adjusted LSM activity, which shows stability in recent months. In March, LSM production is expected to increase compared to February due to positive weather effects. But due to higher base effect, YoY LSM may still be marginally negative.
The trade deficit in goods and services narrowed by 9.1 per cent on MoM basis and 54 per cent on YoY basis, BoP data for the month of March showed. The month of March saw some positive developments as exports of goods and services increased by 9.5 percent and imports of goods and services by 2.3 percent. Higher growth in exports has offset the impact of rising imports as the trade deficit persists.
Remittances rose 27% on a MoM basis to $2.5 billion in March 2023 from $1.99 billion in February 2023, due to better conditions after exchange rate adjustments as the Ramadan and Eid factor attracted higher revenue. played an important role in All the above favorable factors have translated into a current account surplus of $654 million in the month of March, the level observed since November 2020.
For the month of April, imports are expected to pick up marginally compared to March due to the government’s decision to ease some growth-promoting imports, to boost domestic economic activity.
However, remittances will remain at the same level as observed in March. Accordingly, all these factors will contribute to reducing the overall current account deficit.
Amidst the unprecedented challenges posed by the domestic and global economic situation, financial stabilization efforts are on track. The aim is not only to create the much-needed fiscal buffer but also to restore economic stability.
Effective implementation of consolidation measures contributed to a sharp increase in revenue from both tax and non-tax collections while overall expenditure increased due to a large reduction in non-markup costs.
Despite improvements, risks to the financial sector remain. As FBR’s tax collection is growing at the rate of 18%, it fell short of the target for the first nine months of the current financial year due to slowdown in domestic economic activity and import pressure.
On the expenditure side, despite reducing non-markup costs, higher policy rates both domestically and globally account for higher markup payments.
Under these circumstances, the government has a difficult task to follow a prudent strategy of effective revenue mobilization and expenditure management to end the current financial year with a substantial reduction in fiscal deficit compared to last year.
