Covid resurge ‘major risk’ to economy

Ministry says inflation will also remain high because of money circulation growth

ISLAMABAD:

The resurgence of coronavirus cases in the country poses a “major risk” to the otherwise near-term “promising economic outlook” and inflation will also remain high because of a double-digit growth in money circulation, the finance ministry said on Tuesday.

The ministry has also predicted “subdued” exports while imports are projected to increase to the pre-Covid-19 level.

“There are downside risks to the outlook, with the resurgence of the Covid-19 infection as being a major risk,” read the ministry’s October Economic Outlook report.

It added that economic recovery was seen in the first quarter of the current fiscal year and it was expected that this trend would continue but fears and risk factors were appearing because of the second wave of coronavirus.

“Still, Pakistan’s near-term economic prospects are promising subject to reducing uncertainty and restoring business confidence.”

The ministry said there was also significant uncertainty over the evolution of the pandemic and availability of a vaccine and the demand compression measures to curb imbalances along with unfavourable external conditions all weighed on the outlook.

“In the absence of any adverse future shocks, the economy is on its way not only to rebound from the pandemic-related crises, but also to record a reasonable growth rate for the full fiscal year.”

The finance ministry made conflicting predictions on the inflation front and also gave a wide range of 7.3% to 9.3% for headline inflation in October.

“On the basis of the current economic scenario, the headline inflation is expected to remain within a range of 7.3 to 9.3% in October 2020,” it said in the report.

By the last week of the month, the monthly inflation numbers are known to the ministry and still it chose to give such a wild projection.

The Consumer Price Index-based monthly inflation jumped above 9% in September.

The underline inflationary pressures have not subdued due to the double-digit growth in money circulation, although the finance ministry tried to pin the blame on food prices.

It said the CPI increased due to the abnormal spike in the prices of perishable items and the rates of tomatoes and onions increased on account of crops damaged due to heavy rains.

The price trend is predicted to ease in November once the local production starts arriving in the market.

According to the central bank data, the currency in circulation increased by Rs3.1 trillion in the past one year to Rs20.9 trillion, showing a 17.4% increase.

The double digit growth in money supply would keep the prices elevated.

During July 1 to October 2 this year, the money supply witnessed a cumulative expansion of Rs103.4 billion against Rs28.7 billion last year. The contributor in the growth of money supply was Net Foreign Assets (NFA) which stood at Rs289.1 billion. The private sector is still not showing any major sign of revival.

The finance ministry said the private sector credit witnessed a retirement of Rs122.4 billion in comparison with Rs49.4 billion last year

The private sector credit demand remained muted primarily for working capital requirement in the wake of surplus inventories particularly the manufacturing concern.

The borrowing of the textile sector (one of the major subsectors of manufacturing) remained subdued due to enough liquidity received in the form of tax refunds in the wake of lockdown, according to the ministry.

It said that the credit requirement will start picking up from October-November after the arrival of cotton in the market.

For the farm sector, the finance ministry noted that as per the preliminary estimates of major Kharif crops during this fiscal year, the production of sugarcane increased to 75.6 million tons from 66.4 million tons last year showing an increase of 14%.

Rice production is estimated at 8.2 million tons, showing an increase of 10.4% over 7.4 million tons in the corresponding period last year.

However, the preliminary estimates for cotton production remained low to 8.5 million bales showing a decline of 6.9% against last year’s production level of 9.2 million bales due to a decline in the area under cultivation as well as unprecedented rains.

Maize production is estimated at 7.86 million tons, slightly declining by 0.3% against 7.88 million tons last year.

The menace of desert locusts has now been completely brought under control in the country, said the ministry.

The imports might return to pre-coronavirus level in October but exports will remain low since economic activity in most of the trading partners has not yet fully recovered.

The ministry said the exports of goods and services in October may come to around $2.7 billion while imports may reach around $ 4.3 billion.

In the first quarter of FY2021, remittances were 31% higher than in the corresponding quarter of the last fiscal year. “It is expected that the pattern will continue in October as well due to the policy measures that have positively affected the channels of remittances transfers,” the report read.