Pakistan’s economic growth prospects showing signs of improvement

Prospects of economic growth in Pakistan are showing visible signs of improvement during Jul-Jan FY 2021, which strengthen expectations about economic recovery stated the Finance Ministry.

As per monthly “economic update and outlook” of the Finance Ministry for the month of February 2021, recent developments in inflation, shows that, both YoY and MoM inflation is on a negative trend in recent months.

It is expected that due to much needed structural measures, the downward trend of prices of these items will be permanent. In that case, the downward shift in the CPI level will induce derived effects such as lower indexations of other prices and wages, lower production costs, lower inflation expectations, etc.

These second-round effects are mutually reinforcing and therefore not only the CPI level but also the future inflation rate may follow a lower path than what would otherwise have been if these policy measures were not taken. However, international commodity prices are recently on a rising trend, especially oil prices and food prices.

Taking all these observations into account, YoY inflation for next month may remain between 5.5−7.5 percent.

In agriculture sector, the report was of the view that downside risk to cotton production still persist, however it is expected that better production of other Kharif crops will mitigate the risk. Further, for Rabi season 2020-21, wheat crop production is expected to achieve production target as almost 99 percent target area has been sown.

In industrial sector, since July 2020, the YoY growth rate of LSM remained positive on monthly basis. Industrial activity is recovering from two consecutive crises. The BOP crises necessitated policy adjustments to curb unsustainable external deficits which depressed LSM in 2019. The COVID-19 pandemic required measures to preserve peoples’ health which caused industrial output to fall significantly especially in March, April and May

However, the Monthly Economic Indicator (MEI), which is based on combining monthly data of indicators that are proven to be correlated with GDP at constant prices shows continued strong growth in January, in continuation with what was observed in the previous seven months.

It follows that economic growth has been strong throughout the first half of the current fiscal year and will continue to show improvement in the second half of the current fiscal year

On balance of trade, after a very strong MoM increase in Dec 2020, partly due to seasonal effects, imports came back to the normal levels in Jan 2021, resulting in a MoM improvement in the trade balance. Although they remain supported by the ongoing economic recovery and further increases in international commodity prices, imports in Feb 2021 are expected to remain lower or at around the same level observed in Jan 2021.

On the other hand, incentives provided to export-oriented industries, exports are expected to kick off up to a higher level. As a consequence, in the baseline scenario, the trade balance is expected to show further improvement as compared to the two previous months.

Regarding remittance inflows, these remained strong and still expected to provide support to finance trade deficit.

The report said that the resurgence of the COVID-19 infection placed considerable strain on the fiscal side of the economy during the first half of the current fiscal year. Despite significant challenges, the revenues side performed better on the back of improved tax collection both at the federal and provincial level. The performance is an indication of growing economic activity even in the wake of challenges posed by second wave of the pandemic.

This implies that, as economic activity accelerates further, there would be more increase in revenues. On the other hand, the expenditure side is expected to remain under pressure due to COVID related expenditures.