ISLAMABAD: According to the Finance Ministry’s Monthly Economic Update and Outlook for February, inflation is expected to remain at 28 to 30 percent in the coming months due to a number of factors before easing gradually.
While interest payments will increase total expenditure, it will limit the financial space to carry out general operations, investment, and social and structural policies.
In its monthly report released on Tuesday, the ministry said the main reasons were “uncertain political and economic environment, currency devaluation, recent increase in energy prices and increase in administered prices”.
Although the State Bank of Pakistan (SBP) is pursuing a contractionary monetary policy, inflationary pressures will take some time to dissipate. The report said that the federal government, in coordination with the provincial governments, is closely monitoring the supply-demand gap of essential commodities and taking necessary steps to stabilize prices.
The resumption of the economic stabilization program will help achieve economic and exchange rate stability, while also providing an opportunity to take advantage of falling international commodity prices.
“It will also help curb cost-push inflation and help the government pass on lower commodity prices to domestic consumers,” it said.
Favorable weather and input from farmers could help meet the target of 28.4 million tonnes of wheat, while distribution of the Kisan package would also have a positive impact on agricultural production and overall economic activity, the report said. Should.
The cyclical pattern of large-scale manufacturing (LSM) is positively correlated with the cyclical position of Pakistan’s main trading partners, and in December 2022, LSM activity came in line with expectations, implying that there was no non-significant increase in the month. The expected shock did not come.
However, the international economic environment is uncertain. This is exemplified by CLI in key export regions of Pakistan, which were somewhat negative by historical standards.
The ministry expects LSM to increase in January compared to the previous month, partly due to weather factors. “Measured on a YOY basis, LSM output may decline marginally, mainly due to a higher base effect in the reference period,” the ministry forecast.
It added that the average monthly economic index (MEI) was positive during the first seven months of the current financial year, but slightly negative in the last four months. From October 2022, the following months till January saw negative growth with some improvement in the MEI.
On balance of payments data, goods exports declined by 11.7 percent and services exports increased by 17.3 percent on a year-on-year basis in January 2023, justified by economic slowdown in Pakistan’s traditional export destinations. Can be attributed to the cause.
Total exports declined by 4.3% MoM in January due to adverse weather impact, while imports continued to decline. Thus, a significant improvement in the trade balance was transmitted to the current account deficit, which stood at $242 million as against $290 million in December.
Remittance inflows also saw a negative seasonal impact in January, declining to $1,894 million as against $2,102 million in December 2022.
However, remittances are expected to recover after the gap between the interbank and open market following the adjustment in the exchange rate. As a result, the current account may improve further.
Despite considerable challenges on both the domestic and external fronts, the performance of the financial sector remained satisfactory. The government has been able to narrow the fiscal deficit in terms of GDP to last year’s level while the primary balance remained in surplus.
The improvement was attributed to the government’s prudent expenditure management strategy, which resulted in a 3.9% decline in federal non-markup expenditure due to reductions in subsidies and grants.
The current policy stance has enabled the government to increase spending on the weaker sections of society through the Benazir Income Support Program (BISP) and the Poverty Alleviation Fund. On the revenue side, the ministry said despite the slowdown in economic activity, tax and non-tax collections have improved.
Notably, the tax collection of the Federal Board of Revenue (FBR) maintained its growth rate above 18 percent during the first seven months of the current financial year. “Encouragingly, domestic tax collections, particularly, direct taxes are increasing rapidly indicating effective implementation of administrative and enforcement measures,” it noted.
Although risks remain due to the slowdown in economic activity and growth, continued efforts to increase tax collection will help meet the full-year target, especially the recently implemented additional taxes of Rs 170 billion. in view of.
