- Ministry of Finance says primary contributors to increasing inflation are surge in international commodity prices and massive exchange rate depreciation
ISLAMABAD: The Ministry of Finance (MoF) has cautioned that Pakistan is currently facing several severe challenges of accelerating inflation, high external deficits, volatile exchange rate, and declining foreign exchange reserves coupled with mounting uncertainty.
The Finance Ministry’s “Economic Update and Outlook” for May 2022, released Saturday said that in the presence of these macroeconomic imbalances the economic growth which remained relatively high, may not be sustainable.
It said that the primary contributors to increasing inflation are the surge in international commodity prices and the massive exchange rate depreciation.
In fact, the depreciation of the rupee both against the dollar and on a trade-weighted basis against the currencies of Pakistan’s main trading partners is primarily a reflection of the inflation differential between Pakistan and its main trading partners.
Further, relatively high domestic inflation is compensated by rupee depreciation.
However, currency depreciation itself feeds into higher domestic inflation.
In this sense, Pakistan is caught in a vicious inflation/currency depreciation spiral. In the short run, a predicament to stop this cycle is to pursue restrictive fiscal and monetary policies, coupled with policies and announcements that restore market agents’ confidence.
In the longer run, Pakistan’s main problems can be solved by designing a credible sustainable future economic trajectory that inspires consumers’ and investors’ confidence. Economic decisions are based on expectations about the future economic path as well as on the degree of certainty/confidence of development prospects.
An important component of such a process is supply-oriented policies. Pakistan’s propensity to invest is much lower compared to high-growth emerging markets and developing countries. Accelerating the share of Gross Fixed Capital Formation in GDP would create additional production capacity to meet the increasing demand of consumers and producers.
Such a supply-oriented framework designed to reallocate the use of national income from consumption to investment expenditures may be accompanied by suitable demand management policies.
The sowing of Kharif 2022 crops is under progress in the country although sufficient inputs are available to the farmers, favourable weather and climatic condition are the pre-requisites for better crop output. Agriculture credit (provisional) Rs1,058.7 during July-April 2021-22 was down by 1.4 per cent over Rs1,073.5 for the same period a year ago 1,058.7. Disbursement of credit to the private sector (flows) during (1st Jul to 13th May-2021-22 was Rs1,345.2 billion compared to Rs420.7 billion (1st Jul to 14th May 2020-21), Fiscal deficit was recorded at 3.8 per cent of GDP (Rs2,565.6 billion) during Jul-March 2022 compared to three percent of GDP (Rs1,652 billion) for the same period of last year, whereas, primary balance posted a deficit of Rs447.2 billion against the surplus of Rs451.8 billion during the period under review.
Total revenues grew by 17.7 per cent in July-March 2022 against the growth of 6.5 per cent for the same period of last fiscal year as total tax collection (federal and provincial) increased by 28.1 per cent, whereas, non-tax collection declined by 14.3 per cent during the period under review against the sharp rise of 27 per cent in total expenditure witnessed during Jul-March 2022. The CPI inflation is recorded at 13.4 per cent in April 2022 as against 11.1 per cent in the same month last year.
The GDP growth is projected at 5.97 per cent with LSM witnessing a growth of 10.4 per cent during July-March 2022, compared to 4.2 per cent growth in the corresponding period of last fiscal year and agriculture 4.4 per cent during the fiscal year 2022.
The current account deficit stood at $ 13.8 billion for July-April 2022 against $ 543 million for the same period a year before and the FDI stood at $1,455.6 million against $1,480.0 million last year reflecting a decline of 1.6 per cent and portfolio investment declined to $473.5 million during July-April 2022 from $2,463.1 million for the same period of last fiscal year. Remittances subsequent to 7.6per cent growth increased to $26.1 billion in July-April 2022 from $24.2 billion for the same period a year before.
Copyright Business Recorder, 2022