Accelerated economic recovery to continue: Economic Outlook

Increased production may boost exports, domestic production might substitute for imported products, says report


APP October 28, 2021
PHOTO: APP

ISLAMABAD:

Given the performance of various economic indicators, the economic recovery that had accelerated since March 2021 is expected to continue, according to the Monthly Update and Outlook for October 2021 report released by the Finance Ministry on Thursday.

According to the report, increased production may boost exports while domestic production might partially substitute for imported products.

“Increased production also stimulates exports, while supply-side induced increase in domestic production may partially substitute for imported products. On the other hand, the need for necessary intermediate inputs in the production process also increases. The increased incomes generated by economic growth also raises the demand for domestic and foreign products,” the ministry maintained in the report.

It further stated that measures were being implemented to curb unnecessary imports which do not contribute to the expansion of domestic production.

“Nevertheless, the economic expansion may go along with a current account deficit,” the report said, adding that it was normal for emerging and developing countries to run current account deficits, financed by financial inflows from developed nations.

“It is strongly realised that as long as the deficits are manageable, their contribution remains productive for achieving a higher and sustainable growth trajectory, necessary for the convergence of per capita income with developed countries,” it added.

The report claimed that by the end of the first two months of the fiscal year 2021-22, the fiscal deficit will be restricted to almost the same level as it was in the comparable period of the previous year.

“The government was following a careful expenditure management strategy to ensure that critical areas were not ignored and that sufficient resources were available for growth-oriented and social security-related programs,” it further said.

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This measures were said to pave the way for better financial prospects and sustained economic recovery.

On the revenue side, the report added, the Federal Board of Revenue (FBR) was focused on sustaining a successful streak of surpassing the tax collection target during the first quarter of FY-2022 and had already taken a number of initiatives in this regard.

The board, as per the economic outlook, was implementing digitalization and automation of various processes involved in the revenue collection - launching of the Point of Sale (POS) and the Track and Trace system were examples of such initiatives.

“Furthermore, the FBR has taken a number of measures to promote economic activities through maximum taxpayer facilitation,” the report read.

All this augurs well for sustaining the momentum of tax collection achieved during Q1 FY-2022, it maintained, adding that the FBR was on course for achieving the revenue target set for the current fiscal.

The report also added that on the external side imports of goods and services in September were marginally lower than their levels observed in August. The persistent rise in international oil prices, exchange rate pressure, and the rise in domestic economic activities were contributing to the rise in import demand.

Given these recent dynamics, it can be expected that in the following months, imports may remain at their current high levels. Therefore, the government's recent steps in terms of monetary policy and the measures taken to discourage unnecessary imports would be helpful in containing the strong expansion recorded in recent months.

As expected, exports of goods and services crossed the $3 billion mark, helped by the ongoing strong recovery in Pakistan’s main export markets, the momentum in domestic economic dynamism, and specific government policies to stimulate exports. These dynamics are expected to keep exports above the $3 billion mark in the months ahead.

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As a result of these events, the trade deficit of goods and services retreated from the level observed in August and is expected to first stabilise and then decline in the months ahead.

The report detailed that if remittances stay roughly at current levels in the coming months – and considering other income inflows which have a relatively minor share – the current account deficit would be driven by the trade deficit which would be stabilised and improved thereafter. However, these developments were stated to have to be monitored closely.

The report further maintained that the inflation rate was mainly driven by monetary and supply-side factors, particularly the domestic and international commodity prices, the US Dollar exchange rate, seasonal factors and economic agents’ expectations concerning the future developments of these indicators.

The government’s structural policies to improve the functioning of the market structure, particularly food markets, play an important role, it said.

Since May the year-over-year inflation has observed a downward trend until September. However, the report maintained that the recent surge in international oil prices, exchange rate depreciation and adjustments had an impact on prices.

The effect of these impulses may intensify the magnitude of prices and transportation costs. Traditionally the month of October "shows positive seasonality".

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