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Monthly report claims inflation should reduce in coming months as global commodity prices decline
The Ministry of Finance on Monday released its Monthly Economic Update and Outlook report for December 2021, estimating average monthly growth at around 5% in the first five months of the current fiscal year despite ongoing inflationary pressures and resultant policies undertaken to counter them.
Per the report, Pakistan’s overall trajectory of growth has been higher during the 2021-22 fiscal year as compared to the previous year. It said this was based on observed favorable movements in macroeconomic high frequency indicators such as growth in large-scale manufacturing, recovery in Pakistan’s main trading partners and strong growth in imports of capital goods. The momentum in the economic dynamism observed in recent months supported economic activity in November, it added.
It said that authorities expected inflation to ease in the coming months as global commodity prices declined. In addition, relief might also come from continuous government efforts to soften food prices in the local markets by following appropriate fiscal and monetary policies, it added.
Similarly, the report projects the current stress on the trade balance to soften and ease pressure on the currency exchange rate as well as stabilize inflation. The average Monthly Economic Indicator (MEI) report noted that demand for Pakistani exports had not been diminished by the spread of the Omicron variant of COVID-19. “But we should also not ignore the impending risks, including the concerns of the policymakers, about the inflationary effects and the resulting policy response,” it added.
According to data on the balance of payments, exports of goods and services increased by around 13 percent in November as compared to October, settling above the $3 billion mark with expectations for further growth in the coming months. The report said the strong exports performance was based on several factors:
- First, although the cyclical position in the main trading partners (as witnessed by the composite leading indicator) seems to stabilize, the underlying growth trend in those countries remains very strong, following the recovery in their potential output growth.
- Second, Pakistan’s real effective exchange rate has been improving significantly in recent months.
- Third, the domestic economic dynamism remains strong.
- Fourth, specific government policies to stimulate exports are bearing fruit, though the risk factor of a new COVID-19 variant and its effects on economic activity are still unknown.
Meanwhile, imports of goods and services increased about 5 percent in November compared to October. This supports strong domestic economic dynamism, read the report, saying imported energy, capital goods and intermediate goods, necessary in the production process, were required. Further, recent increase in international commodity prices have inflated the cost of these imported goods.
However, the report claimed imports were expected to reduce in the near future. “Imports are indeed expected to react to higher domestic interest rates, given the historically observed negative interest rate effect on import demand,” it said.
According to the report, the government is working to curb unnecessary imports and supply domestic alternatives in some markets, especially food products. Coupled with an expected downward correction of international commodity prices, the report said the trade deficit would stabilize in future.
Assuming stable remittance inflows, said the Finance Ministry, the expected improvement in the trade balance would be reflected in declining current account deficits. Between July and October, the report said growth in net federal revenues outpaced growth in expenditures. Resultantly, the fiscal deficit has been brought down to 1.1 percent of GDP during the first four months of FY2022 against 1.7 percent of GDP in the same period last year.
The report also praised the tax revenue collected by the Federal Board of Revenue, noting it had surpassed the revenue target during the first five months of the current fiscal year and was on track to achieve its assigned target for FY2022. It said that net federal revenue receipts had increased by 17.4% to Rs. 1.2 trillion between July and October period this year, up from Rs. 1.1 trillion during the same period the previous year. Overall, it said there had been 36.7% increase in tax and 5.4% increase in non-tax collection.
Meanwhile, total expenditures increased by 11.7% to Rs. 2.2 trillion in July-October, compared to around Rs. 2 trillion last year. This increase, the report said, was due to an 8.5% increase in current expenditures and 55.6% growth in Public Sector Development Program spending. The overall fiscal deficit, it said, had reduced to 1.1% of GDP, Rs. 587 billion, in the first four months of FY2022, down from 1.7% or Rs. 775 billion in the same period last year.
The MEI is based on combining monthly data of indicators that are correlated with the gross domestic product at constant prices. “Since March 2021, the MEI is on a higher level as compared to the previous months,” said the report.