Pakistan’s economy faces strong headwinds and may not sustain 6% economic growth in the next fiscal year, as it is caught in a vicious cycle of inflation and currency depreciation, said the Ministry of Finance on Saturday.
The monthly Economic Outlook, which marks a departure from the previous edition, raised many red flags about the health of the economy, puncturing the narrative of “leaving behind a good economy” of the previous government of Pakistan Tehreek-e-Insaf (PTI).
“Pakistan is caught in a vicious inflation and 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 agent’s confidence,” said the economic advisory wing of the finance ministry.
The rupee has been constantly losing its value and dropped to Rs203 to a dollar on Thursday before recovering to Rs200 the next day. The delay in finalising a deal with the International Monetary Fund (IMF) has put additional pressure on the demand for the greenback.
It added that although the economy achieved nearly 6% growth in the outgoing fiscal year, the fiscal situation and external sector performance were making it difficult to sustain and may impact the growth outlook in the coming year.
Analysts believe that the PTI government’s 6% economic growth had been financed by imports and consumption, which led to the external sector crisis.
The report underlined that Pakistan was currently facing several severe challenges – accelerating inflation, high external deficits, exchange rate depreciation, declining foreign exchange reserves and mounting uncertainty.
On the other hand, the economic growth remains relatively high, but in the presence of macroeconomic imbalances may not be sustainable, said the ministry.
Monetary tightening intended to curb import growth and inflation may impede economic growth.
After the ouster of former prime minister Imran Khan, the political and economic situation remains uncertain due to the increasing pressure from the PTI to call snap elections.
The finance ministry said that the domestic and international scenarios were changing, which carried implications for the economic activities. The inflationary and external sector pressures “are creating macroeconomic imbalances in the economy”.
Since January 2022, the average monthly increase in inflation has been 1%. This base effect implies that the main lever to reduce the yearly inflation is to limit the monthly increases in the Consumer Price Index (CPI).
Bringing yearly inflation down below 10% in the very short run would require consecutive monthly reductions in the CPI, it said.
For the current month, the Ministry of Finance has given inflation range of 12.5% to 13.8%, which suggests a slight uptick in the index compared with the preceding month.
The ministry said that the international commodity prices were on a rising trend and expected to increase further.
The government on Thursday increased the petroleum product prices by Rs30 per litre, or up to 25%, to meet a condition of the International Monetary Fund (IMF), which is expected to stoke inflation in the country.
The finance ministry also projected a decline in imports and foreign remittances in May, both going down compared with the preceding month.
On a month-on-month basis, the growth in imports of goods is expected to be negative due to the ban on non-essential and luxury items, according to the ministry.
However, the experts do not see any major reduction in the import bill due to the ban.
Remittances are expected to be around $2.5 billion in May, slipping below the $3 billion mark. Though the remittances surged in April due to the Eid factor, they may return to normal levels in the coming months.
Taking these factors into account, the current account will stay well below $1 billion in the coming months, according to the ministry.
The current account deficit peaked at $13.8 billion during the July-April period, up several times from the $2.3 billion target for the current fiscal year.
The ministry hoped that the import content of domestic growth would subside somewhat, backed by restrictions on unnecessary imports. Furthermore, a slower potential economic growth in the coming months may contain the import bill.
On the revenue side, assuming a constant Real Effective Exchange Rate (REER), the export content could stabilise at around current levels. “These projections imply an improvement in the balance of trade in goods and services,” it added.
Published in The Express Tribune, May 29th, 2022.
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