Economic outlook uncertain, blurry

Finance ministry says inflation will stay around 21% in short term

ISLAMABAD:

Pakistan’s economic outlook remained uncertain and blurry while inflation would stick around current level of 21% in the short term, said the Ministry of Finance on Thursday, amid the government’s failure to stem rupee depreciation that was causing price hike.

In its monthly economic outlook for July, the economic advisory wing underlined that the inflationary and external sector risks were building macroeconomic imbalances in the economy.

It added that the ongoing political unrest was increasing economic uncertainty, which was causing the rupee to depreciate, which also had an impact on the cost of production.

“All these factors are making the economic outlook uncertain,” stated the finance ministry. Halting investment decisions was further making the outlook blurry, it added.

“The higher interest rate followed by monetary contraction is also adversely affecting perception about the outlook of the economy.”

The grim picture painted by the government is in line with the prevailing international conditions and also supports market sentiment amid massive devaluation of the rupee against the greenback that is further complicating the economic scenario.

The dollar climbed to a new high of Rs240 after the rupee fell by another Rs3.92 to a dollar in the inter-bank market on Thursday. Since the PML-N rout in Punjab, the rupee has lost Rs29, or 13.7%, of its value.

Under the watch of Prime Minister Shehbaz Sharif, the rupee has so far lost Rs55, or 30% of its value, which should be a matter of grave concern.

The finance ministry said that high international prices were still adversely affecting external positions even in the new fiscal year. It said that the government had taken all difficult decisions to make the reviews successful, reaching a staff-level agreement for a $1.17 billion loan tranche.

“However, ongoing political unrest is not only creating governance problems but on the other hand intensifying the uncertainties depicted by exchange rate depreciation which will, in turn, impact the cost of production,” said the ministry.

The finance ministry said that the government was taking all possible measures to counter those pressures so that the economy could achieve the growth target of 5% during the current fiscal year.

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However, the central bank has given 3% to 4% economic growth range, which should also be the target due to the prevailing structural imbalances.

The ministry said that year-on-year inflation in July 2022 may hover around the level observed in June, which was also due to a low base of 8.4% in July 2021. The inflation rate in June was 21.3% - the highest in almost 14 years.

The yearly inflation has remained in double digits since November 2021. This hike in inflation will continue in July 2022 and hover around the level observed in June 2022 due to increase in international commodity prices, particularly energy prices, and depreciation of the rupee, said the ministry.

The recent acceleration in inflation was due to supply chain disruptions, high transportation charges, and surging global commodity prices, according to the ministry.

In response to the elevated inflationary pressure, the SBP raised the policy rate by 125 basis points to 15%.

“The decision of monetary tightening since September 2021, on account of an exceptionally challenging and uncertain global environment, would stabilize economic activity, prevent a de- anchoring of inflation expectations, and provide support to the Rupee in the wake of multi-year high inflation and record imports,” said the ministry.

The finance ministry said that despite the gradual decline in the economic growth outlook in Pakistan’s main export areas, domestic economic activity continues to be strong. But international reserves have fallen to levels that are too low according to international standards.

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These factors have contributed to significant upward pressure on domestic interest rates and the SBP had to raise its policy rate. Furthermore, significant fiscal consolidation is in the making.

These developments may put downward pressure on domestic demand and risk to slow down economic growth in the short run.

It said that during July-May 2022, the fiscal deficit increased by 5.2% or Rs3.5 trillion. Similarly, the primary balance posted a deficit of Rs945 billion or 1.4% of the GDP during this period.

The finance ministry said that the current account deficit is expected to steadily decline in the coming months. However, for July 2022, based on low import growth and better performance of both exports and workers’ remittances, a significant decline in the current account deficit is anticipated

The current account deficit peaked to $17.4 billion during the just ended fiscal year as against a deficit of $2.8 billion in the preceding 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.

In June 2022, the surge in imports of goods owing to increase in international commodity prices widened the trade deficit. Workers’ remittances were not enough to finance the trade deficit, as a result the current account deficit widened.

The ministry said that with the government’s policy measures imports will fall, while better performance of exports of goods and services and workers’ remittances will bring the current account deficit to a manageable level in the coming months.

Published in The Express Tribune, July 29^th, 2022.

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