High inflation, low growth and falling forex: Country confronted with variety of challenges: MoF
ISLAMABAD: Pakistan is currently confronted with the challenges such as high inflation, low growth and low levels of official foreign exchange reserves, while fiscal accounts are under immense pressure on account of heavy interest payments and rehabilitation spending.
This was acknowledged in the Monthly Economic Update & Outlook January 2023 released by the Finance Division.
Data uploaded in the report indicates a 1.7 billion dollars decline in remittances during the first half of the current year compared to the same period the year before (a decline of 11.1 percent), exports declined by 6.6 billion dollars (6.8 percent decline), foreign direct investment dipped by 654 million dollars (58 percent decline), portfolio investment plummeted from negative 45.5 to negative 1032 million dollars, Public Sector Development Programme(including grants to provinces) decreased by 122 billion rupees (48.4 percent) and credit to private sector from 1043.1 to 703.6 million rupees which contributed to a decline in November 2021 Large Scale Manufacturing Sector growth of 6 percent to negative 5.50 percent in the comparable period this year.
Inflation to cross 30% as rupee depreciation, petrol prices bite: report
Consumer Price Index rose from 12.3 in 2021-22 to 24.5 2022-23, while PSX index declined by 2.8 percent, market capitalization in rupees by 8.8 percent and in dollars by a whopping 28.8 percent.
The report projects CPI year on year (YoY) basis for January 2023 in the range of 24-26 percent but predicts inflationary pressure will calm down gradually due to flood-led damages which have disrupted the supply of essential items.
Rising prices of onions and wheat both are the key factors responsible for affecting the general price level. International commodity prices are showing a downward trend on a YoY basis and its impact will ultimately be transmitted into domestic prices with some lags after adjusting the currency devaluation. While the government kept the administered prices at their current level to stabilize the overall prices but post floods persistent shortfall of essential crops is preventing inflation to settle down.
Month on month increases in consumer prices may be countered by a further mean reverting international commodity prices and some exchange rate stability due to decreased pace of depreciation. The overall money supply growth remains compatible with a return to low and stable inflation.
But the outlook of M2 is broadly dependent on fiscal accounts which are under immense pressure on account of heavy interest payments and rehabilitation spending. Nonetheless, the first five months of CFY have ended with some developments; containing fiscal deficit and surplus in primary balance due to effective fiscal management. The State Bank of Pakistan is also enacting a contractionary monetary policy to contain inflationary pressure. However, a larger portion of volatility in the current price level is explained by supply-side factors.
The Outlook noted that fiscal consolidation is key to saving official reserves and exchange rate stability. This may temporarily be costly in terms of growth prospects in the short term, but long-run prosperity and growth can only be achieved by augmenting the country’s long-term equilibrium growth path by expanding production capacities and productivity. This is a shared responsibility of both the private and public sectors.
The cyclical position of Pakistan’s main trading partners remained in the negative territory since April 2022. In November, LSM activity came in as expected, implying no unexpected shocks appeared in that month. Although some recovery in the LSM cyclical position occurred in November, the LSM output remains substantially below its potential, thereby following the cyclical downturn in the economies of Pakistan’s main export markets.
For December, a rebound of LSM output in comparison to November may be expected, mainly on the grounds of a positive seasonal effect. On the other hand, in December, the YoY growth of LSM may turn out to be slightly negative due to current economic conditions and also due to a high base effect.
According to BOP data, exports of goods decreased by 21.6 percent on YoY basis in the month of December 2022, and exports of services declined by 3.2 percent. As a result, exports of goods and services declined by 18.1 percent in December. Usually, the month of December has observed a strong positive seasonal effect which has played some role and total exports increased by 2.3 percent on MoM basis. On the other hand, imports of goods decreased by 34.4 percent on YoY basis and 2.7 percent on MoM basis in December 2022.
The import of services declined by 44.5 percent on YoY basis. Accordingly, imports of goods and services decreased by 35.9 percent. As imports fell more than the decline in exports, the trade balance of goods and services improved by 52.3 percent. Exports are constrained by domestic production issues related to the slowdown of demand in the main export markets and high domestic production costs. Imports are currently constrained by sluggish domestic demand and administrative measures to protect the official foreign reserves level.
Since no immediate reversal of these developments is envisaged, the trade balance may further stabilize or further improve somewhat in the upcoming months. The current account balance slightly deteriorated in the month of December. This was mainly due to an increase in primary income payments and a decrease in remittances.
Copyright Business Recorder, 2023
Comments are closed.