Worsening trade imbalance: Prices likely to soar in flooding aftermath

Ministry official tells Senate panel that the flood and not sit-ins triggered inflation

ISLAMABAD: The country’s external payments position has come under strain due to the worsening trade imbalance while prices are bound to increase following floods that affected crops standing over 2.4 million acres of land, said a top government functionary on Friday.

The statement given by Finance Secretary Dr Waqar Masood to the Senate Standing Committee on Finance highlights the challenges ahead that the authorities are going to face while balancing their books.



Dr Masood, while briefing the parliamentary body on the impact of the floods on the economy, outlined inflation and the balance of payments position as two serious challenges for the government.

The inflationary and balance of payments pressures have heightened the chances of increase in discount rate after a gap of about ten months, as also indirectly indicated by the ministry of finance on Friday.

Dr Masood claimed that though the protesters did not have any impact on inflation the floods themselves did. Already, he said, the impact on perishable food items has started to appear, indicating a possible increase in prices.

In its written response submitted to the standing committee by the finance ministry, it said that “there is likelihood that headline inflation will surge which may result to follow a contractionary policy by the State Bank of Pakistan (SBP) to contain inflation”.

The ministry said that any contractionary monetary policy will have direct bearing on growth. Without directly mentioning about increase in interest rates, the ministry stated that the contractionary monetary policy will further impact on credit to private sector and will hamper economic activities which may affect the achievement of growth target of 5.1 per cent, set for the current fiscal.

The balance of payments position came under pressure from the trade account side, said Dr Masood. He said during July-August period the current account deficit — difference between external payments and receipts — widened to $1.34 billion, which was 54 per cent higher than the previous fiscal year, he added.

The government is facing the balance of payments pressure at a time when it is struggling to keep $6.7 billion IMF programme afloat. The IMF programme is usually considered a guarantee for getting foreign loans.

Responding to a question, the finance secretary said that some of the members of the board of directors of the SBP wanted to increase the interest rate in the last meeting.

In its written response, the finance ministry also stated that the current political situation has also started impacting the climate for investment. Foreign investment declined by 20 per cent during first two months of the current fiscal year, it said.

The falling investment will put more pressure on external accounts particularly in the wake of widening trade gap due to falling experts, said the ministry of finance.

However, the legislatures belonging to the opposition parties questioned the government’s claim of putting the economy on path of recovery during its first year.

“The so-called economic recovery has been very fragile as it could not sustain a pressure of only 5,000 protesters,” said Senator Usman Saifullah Khan of the PPP. He also questioned the government’s silence over depreciation of Pak rupee, as in his views the cause of depreciation was not the protesters but the speculators.

Published in The Express Tribune, September 27^th, 2014.