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Fiscal consolidation essential for maintaining exchange rates, savings

February 03, 2023

Fiscal consolidation is cited by the Finance Ministry as being essential for maintaining the country's official reserves and stable exchange rates. According to the Monthly Economic Update and Outlook for January 2023, released by the Ministry of Finance, the fiscal consolidation "may temporarily be costly in terms of growth prospects in the short term, but long-run prosperity and growth can only be achieved by augmenting the country's long-term equilibrium growth path by expanding production capacities and productivity," it said.

According to the report, the first five months of the current fiscal year have come to a close with some developments, with the fiscal surplus and deficit being in a primary balance as a result of good fiscal management. Further month-on-month increases in consumer prices may be countered by a further mean reverting international commodity prices and some exchange rate stability due to decreased pace of depreciation.

According to the report, Pakistan is currently facing high inflation, slow development, and low levels of official foreign exchange reserves. It said the expansion of the global money supply (M2) is still compatible with a return to low and stable inflation, but the forecast for M2 is largely dependent on fiscal accounts, which are under extreme strain due to high interest payments and rehabilitation expenditure.

The report states that the disruption in the supply of necessities caused by flood damage is predicted to cause inflationary pressure to eventually subside. In terms of agriculture, it is anticipated that 21.48 million acres of wheat have been sown, accounting for 94% of the goal area of 22.85 million acres. The government's pro-agriculture efforts are helping to boost the productivity of the agriculture sector.

The report says since the start of the current fiscal year, monetary tightening, import reduction tactics, and recessionary global pressure have all been suppressing the performance of the manufacturing sector. In comparison to the rise of 7.2% during the same period previous year, large-scale manufacturing decrease 3.6% from July through November in FY2023.

Year-over-year, large-scale manufacturing decreased by 5.5% in November 2022, whereas it increased by 3.5% in October. The fiscal deficit for the period of July to November in FY2023 has been kept to the same level of 1.4% of GDP as it was for the corresponding period in FY2022. While the previous year's deficit was Rs 36 billion (-0.1% of GDP). The provisional net tax collection increased by 17.4% to Rs 3428.8 billion during July-December FY2023 against Rs 2919.9 billion in the same period last year. The increase in growth is largely attributed to a 49% growth in direct taxes.

As opposed to a deficit of $9.1 billion the previous year, the current account deficit for July through December of FY2023 was $3.7 billion, mostly as a result of a decrease in imports. However, as opposed to $1857 million in the same time previous year, the current account deficit decreased to $400 million in December 2022, mostly due to an improvement in the trade balance.

Foreign direct investment (FDI) reached $ 460.9 million during July-December FY2023 ($ 1114.7 million last year), decreasing by 58.7%. In July-December FY2023, workers' remittances were recorded at $ 14.1 billion ($ 15.8 billion last year), which decreased by 11.1%. On a MoM basis, remittances decreased by 3.2% in December 2022 ($ 2.0 billion) compared to November ($ 2.1 billion).

On January 24, 2022, Pakistan's SBP reserves climbed to $3.678 billion, bringing the country's total liquid foreign exchange reserves to $9.45 billion. The reserves of commercial banks remained at $5.77 billion. According to the study, the KSE-100 index reached a closing point of 40,420 points on December 30, 2022, and its market capitalisation reached Rs 6,501 billion.

Credit: Independent News Pakistan-WealthPk