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ISLAMABAD: The Ministry of Finance has stated that despite achieving a real GDP growth of 5.97 percent in the fiscal year 2022, the underlying macroeconomic imbalances and mounting international risks are depicting a challenging outlook especially, pertaining to the external sector.

The ministry in its monthly, “Economic Update and Outlook” released Wednesday stated that economic growth in Pakistan is facing challenging situation due to wider macroeconomic imbalances. The delayed pass-through of international oil prices into domestic energy products may increase inflation.

The report noted that Pakistan’s growth prospects are expected to remain satisfactory. But the number of potential risks may diverge it from optimal path. First, the cyclical position of Pakistan’s main trading partners is somewhat deteriorating. Their central banks are raising interest rates to counter inflation thus, leading to a possible recession in those countries.

The update noted that the State Bank of Pakistan (SBP) may further raise domestic interest rates. The demand management policy of SBP may not be very effective as the current waves of inflation are largely caused by supply constraints and increasing international prices, especially commodity prices. Exchange rate depreciation is also a source of concern as it makes the imported raw material more expensive.

The persistent rise in domestic consumer prices is eroding real incomes, limiting the spending power of consumers and investors.

May's inflation reading hits 13.8% in Pakistan

These risk factors may challenge the macroeconomic environment and growth prospects, especially by negatively affecting the temporary cyclical output gap. The economy would tend back to potential output in the long runs. Sound policy responses may lay the basis for a sustainable long run growth trajectory. This should be accompanied by measures that aim to strengthen the growth of Pakistan’s potential output. These measures need to include the creation of a beneficial investment climate, confidence promotion and stimulus for promising economic initiatives with high growth potential, it added.

The government has withdrawn subsidies on fuel and energy products to control the mounting twin deficit. As a result, a sharp increase in prices of all oil products is witnessed. Further, the recent rise in international commodity prices especially energy and food, will also be translated into domestic prices. The year-on-year (YoY) inflation is expected to accelerate in June and may remain within the range of 14.5-15.5 per cent.

Headline inflation (CPI) in May 2022 was recorded at 13.8 per cent against 10.9 per cent in the same month last year. During Jul-May fiscal year 2022, the CPI was recorded at 11.3 per cent compared to 8.8 per cent in the same period last year.

Escalating food prices, high transportation cost and rising fuel and energy prices remained major drivers of inflation. Supply constraints and soaring global commodity prices have also inflated the domestic prices.

Uncertain geopolitical situation due to Russia-Ukraine conflict has exacerbated the uncertainty and intensified the supply disruptions as observed by skyrocketing international commodity prices. This acceleration is expected to continue in June 2022 and may intensify due to a steep increase in the energy prices.

The report noted that major fiscal indicators deteriorated during the first 10 months of the fiscal year 2022. The overall fiscal deficit increased to 4.9 per cent of GDP (Rs3,275 billion) during Jul-Apr 2022, up from 3.6 per cent (Rs2,020 billion) recorded in the same period of last year.

The primary balance posted a deficit of Rs890 billion (-1.3 per cent of GDP) against the surplus of Rs159 billion (0.3 per cent of GDP) during the period under review.

The deterioration has been triggered due to an increase in total expenditure with a higher pace relative to revenues. Total expenditure grew by 32 per cent to reach Rs6,857 billion in Jul-Apr 2022 as compared to Rs5,196 billion last year. Both current and development spending contributed to higher total spending. Especially, current expenditures registered a sharp acceleration of 33 per cent mainly due to higher subsidies and grants.

The Federal Board of Revenue (FBR) provisionally collected tax of Rs5,358.2 billion in Jul-May fiscal year 2022 against Rs4,164.3 billion in the same period last year, representing a growth of 28.4 per cent. In May 2022, the net collection was Rs492.4 billion, a 27.4 per cent increase over the Rs386.6 billion in May 2021.

The domestic tax collection grew by 27.4 per cent to Rs4,464.4 billion during Jul-May 2022 against Rs3,504.6 billion in the comparable period last year. Within domestic tax collection, direct taxes increased by 28.5 per cent, sales tax by 28.2 per cent, and FED by 14.6 per cent. Whereas, customs duty posted a growth of 28.4 per cent during the period under review.

The remittances fell considerably in May 2022 mainly driven by its seasonal profile. This together with the deterioration of the trade balance widened the current account deficit significantly. However, in June 2022, remittances are expected to rebound. Together with the expected relative stability of the trade balance, a contraction in the current account deficit is expected, which may settle at around $ 1 billion.

The current account posted a deficit of $ 15.2 billion for Jul-May fiscal year 2022 as against a deficit of $ 1.2 billion last year. Current account deficit widened due to constantly growing import volume of energy and non-energy commodities, along with a rising trend in the global prices of oil, Covid-19 vaccines, food and metals. Exports on fob grew by 26.7 per cent during Jul-May fiscal year 2022 and reached $ 29.3 billion ($ 23.1 billion last year). As per Pakistan Bureau of Statistics (PBS), during Jul-May 2022, exports increased by 27.9 per cent to $ 28.9 billion ($ 22.6 billion last year). The exports grew by 57.2 per cent in May 2022 to $ 2.6 billion as against $ 1.7 billion last year.

Imports on fob grew by 36.5 per cent during Jul-May fiscal year 2022 and reached $ 65.5 billion ($ 47.9 billion last year). Resultantly the trade deficit (Jul-May 2022) reached to $ 36.1 billion as against $ 24.8 billion last year. The total imports in Jul-May 2022 increased to $ 72.3 billion ($ 50.0 billion last year), thus, posted a growth of 44.5 per cent.

In the month of June 2022 exports are generally affected by a negative seasonality, but it is expected that the downturn will be to a lesser degree compared to May 2022. Therefore, exports are expected to perform somewhat better in June 2022. On the basis of the continued declining trend in imports on account of measures taken by the government, it is expected that improvement will be observed in the trade balance in June 2022 compared to the one observed in May 2022.

In Jul-May, FDI reached $ 1,596.8 million ($ 1,679.2 million last year) decreased by 4.9 per cent. Foreign Private Portfolio Investment has registered a net outflow of $ 377.6 million during Jul-May 2022. Foreign Public Portfolio Investment recorded a net inflow of $ 367.0 million. The total foreign portfolio investment recorded an outflow of $ 10.5 million during Jul-May 2022 as against inflow of $ 2,172.4 million last.

On MoM basis, workers’ remittances declined in May 2022 due to post Eid factor. In June 2022, remittances are expected to rebound. Taking these factors into account, the current account deficit will settle around $ 1.0 billion. In Jul-May fiscal year 2022, workers’ remittances reached $ 28.4 billion ($ 26.7 billion last year), increased by 6.3 per cent.

Pakistan’s total liquid foreign exchange reserves stood at $ 16.1 billion on June 27, 2022, with the SBP’s reserves recorded at $ 10.2 billion, while commercial banks’ reserves remained at $ 5.9 billion.

Industrial activity is vulnerable to external conditions as expected, LSM output contracted in April as compared to March. LSM may contract in May as compared to April mainly due to strong negative seasonal effects. But on YoY basis, LSM is expected to show continued solid growth. LSM continued to maintain the growth momentum and reached above the pre-pandemic level with 10.7 per cent growth during Jul-Apr 2022, against 8.5 per cent growth in the corresponding period last year. During the period, 18 out of 22 subsectors of LSM have witnessed growth. On YoY LSM increased by 15.4 per cent in April 2022 while on MoM basis, LSM diminished by 13.3 per cent.

During the period 1st July–03rd June, FY2022 money supply (M2) witnessed growth of 8.4 per cent (Rs2,050.2 billion) as compared growth of 9.8 per cent (Rs2,042.2 billion) last year. Within M2, Net Foreign Assets (NFA) decreased by Rs1,706.6 billion as compared to an increase of Rs1,014.2 billion last year. On the other hand, Net Domestic Assets (NDA) of the banking sector increased by Rs3,756.8 billion as compared to Rs1,027.9 billion last year. Government has borrowed Rs2,488.5 billion for budgetary support against the borrowing of Rs868.4 billion last year. Private sector has borrowed Rs1,422.2 billion as compared Rs448.1 billion last year.

Copyright Business Recorder, 2022

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