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ISLAMABAD: With the fiscal deficit of Rs1,372 billion 2.1 percent of GDP during the first halve of the current fiscal year, the Finance Ministry stated that the Ukraine crisis might increase international oil and food prices, as well as other commodity prices outside and beyond their current cycles.

The monthly Economic Update and Outlook for the month of February 2022 released by the Ministry of Finance(MoF) on Monday noted that recent geopolitical tensions, in particular, the Ukraine crisis, present a considerable risk factor to the otherwise positive outlook for Pakistan’s economy.

These tensions might further lift international oil and food prices, as well as other commodity prices outside and beyond their current cycles. The main question is about the potential strength and duration of this new inflationary factor.

The main risk for the Pakistan economy is that these developments may further delay the downward correction in inflation and improvement in the current account balance.

According to economic update, remittances witnessed an increase of 9.1 percent during July-January 2021-22 to $18 billion as opposed to $16.5 billion during the same period a year before, exports (FOB) increased 27.4 percent to $17.7 billion compared to $13.9 billion and imports increased 66.1 percent to $42.8 billion as opposed to $27. 6 billion during the same period a year before, while the FDI increased by 11.3 percent to 1,166.6 million during July-January 2021-22 compared to 1,048 million during July-January 2020-21.

The economic update noted that the PSDP authorisation was 19.9 percent higher during July-December 2021-22 to Rs566.3 billion from Rs476.6 billion for the same period a year before.

Agriculture credit (provisional) disbursement was Rs740.3 billion showing 3.4 percent increase from Rs715.6 billion for the same period of last fiscal year. Credit to private sector (flows) during July 1 to February 4, 2021-22 was Rs797 billion compared to Rs315.1 billion during July 1 to February 5 in 2020-21.

Pakistan’s economic performance continues to be strong. Its cyclical position is slightly above neutral and the trend growth rate of potential output remains strong.

All currently available information indicates that this economic dynamism will continue in the following months, in which case, the government’s economic growth target for the whole year (around five percent) is likely to be realised.

International commodity prices remain at the upper levels of their current cycles. In these circumstances, it is difficult for domestic prices to start a downward adjustment. High international commodity prices, together with the strong expansion of domestic economic activity keep the value of imports elevated. In the current baseline scenario, the decline in export proceeds in January is considered to be an idiosyncratic event that would not be repeated in the next months.

In his baseline scenario, the trade balance and the remittance inflows are expected to recover in the coming months. As a result, an improvement in the current account balance is foreseen, but these developments need to be closely monitored due to changing global and regional environment.

Recent geopolitical tensions, in particular the Ukraine crisis, present a considerable risk factor to the otherwise positive outlook for Pakistan’s economy. These tensions might further lift international oil and food prices, as well as other commodity prices outside and beyond their current cycles.

The rebased LSM quantum index during the first seven months of the current fiscal year, the output volume of large-scale manufacturing increased by 7.9 percent compared to the same period a year before. This is a considerable upgrade from the increase recorded following the old base LSM index, which grew by 3.7 percent. Consequently, the overall economic growth during the first seven months of the current fiscal year is much better.

The momentum in the economic dynamism observed in recent months is expected to continue supporting economic activity in January.

Exports and imports are usually supported by strong positive seasonal effects in the months of December 2021. In the month of January these seasonal effects largely disappear. Accordingly, even after adjusting for seasonal factors, the exports declined marginally more than expected in January 2022, which resulted in a deficit in trade balance.

Remittance inflows also declined in January, largely due to a negative seasonality that is typically observed in January. In sum, the declines in net exports and remittances caused the current account balance to worsen in January.

In the current baseline scenario, the decline in export proceeds in January is considered to be an idiosyncratic event that would not be repeated in the next months. The trade balance and the remittance inflows are expected to recover in the coming months. As a result, an improvement in the current account balance is foreseen.

Despite significant pressure on the expenditure side due to Covid-19 grants, IPPs circular debt settlement, social sector spending, better expenditure control and effective resource mobilisation strategy remained in place for better fiscal outcomes.

Furthermore, the cumulative surplus of all the four provinces was higher than the previous year. The fiscal deficit in terms of GDP thus, contained at the same level of 2.1 percent as recorded last year, while the primary balance remained in surplus.

The government will continue to follow the same strategy for the rest of the year in order to contain the fiscal deficit within manageable limits. Moreover, on the revenue side, the FBR has been able to achieve more than 57.5 percent of its annual target during the first seven months of the on-going fiscal year, whereas, the overall budget achievement for the first seven months during last year stood at 54.7 percent.

The Federal Board of Revenue (FBR) has implemented a variety of initiatives both at the policy and operational level to increase the revenue potential through digitisation, transparency and the taxpayer’s facilitation. Consequently, it has also resulted in healthy and consistent growth in revenue collection. It is, therefore, expected that the FBR tax collection would meet its target set for the current fiscal year.

Copyright Business Recorder, 2022

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