Pakistan’s economic outlook likely to remain below target

October 05, 2022

Abdul Wajid Khan

The economic outlook for Pakistan in the current fiscal year was likely to remain below the target, while macroeconomic imbalances might ease with an expected slowdown in economic growth, the finance ministry said in a report.

Global and domestic uncertainties were surrounding the economic prospects, WealthPK reported quoting the ministry’s latest Monthly Economic Update & Outlook report.

Recent floods caused by extremely strong monsoon rains had negatively impacted crops, altering the economic outlook mostly through agriculture performance, it said.

The country - already confronted with inflationary and external sector pressures - is now under severe economic and humanitarian crisis due to the recent flash floods.

The report said that high inflation, aggressive monetary tightening and uncertainty from the Ukraine crisis and the pandemic had hampered the global outlook in 2022.

Soaring food and energy prices were eroding real earnings, generating a global cost of living catastrophe for vulnerable communities, it added.

Rising government borrowing costs and capital outflows exacerbate fiscal and balance of payments pressures in many developing countries on the basis of forward-looking indicators, and a further slowdown in global growth is expected.

Therefore, Pakistan faced rising challenges in its external environment, it added.

In the real sector, the recent flash flood had adversely affected cotton and other important crops, making the performance of the agriculture sector more vulnerable.

Large scale manufacturing (LSM) sector posted a negative growth of 1.4 % in July FY2023.

In the fiscal, monetary and external sectors, the fiscal deficit for July 2022 was recorded at 0.3 % of gross domestic product (GDP).

The primary balance posted a surplus of Rs142 billion. From July 1 to September 02, FY2023 money supply (M2) showed a negative growth of 1.8 % as compared to a negative growth of 1.4 % last year.

The report said that inflation had started reverting as the month-on-month (MoM) price increases had been on a declining path during the last two months.  Though the year-on-year (YoY) inflation had shown significant acceleration from June till August.

One reason was a steady decline in international food and oil prices during the last two months.

The further money supply also posted a negative MoM growth rate in that period.

On the other hand, since March, the Pakistani rupee has depreciated against the dollar.

“One worrisome problem is the devastating effects of recent floods which have destroyed a substantial part of crops.”

However, their effects on inflation were being alleviated by prompt government measures to counter forms of price speculation and to provide sufficient supplies by allowing trade from neighbouring countries, the finance ministry report said.

Still, the risk of second-round effects of recent inflationary shocks persisted which might work themselves through the markets, it added.

It could also be observed that in recent years, the month of August showed a positive seasonality in the MoM inflation rate.

All in all, September might bring a halt to the recent drastic accelerations of the YoY inflation rate.

The ministry said that the agricultural outlook was still not clear as the output of both important and other Kharif (early winter) crops had suffered significantly due to recent floods and unprecedented heavy monsoon rains.

The stagnant water in the cropping area might also affect the sowing of Rabi (late winter) crops.

Industrial activity, measured by the LSM index (rebased on prices of 2015-16) is the sector most exposed to the developments in the international market.

The LSM cycle was following the cyclical movements in the main trading partners, but since it was focused on the main industrial sectors and not on total GDP, it was somewhat more volatile than the cyclical component of GDP in Pakistan's main export markets.

As expected, in July, the international economic slowdown and domestic negative seasonal effects dragged down LSM as compared with its level recorded in June, whereas on a YoY basis, LSM showed relative stability, the report said.

For August moderate growth both on a MoM and YoY basis could be expected, unless the effects of the recent floods would jeopardize that scenario.

Since the start of the current fiscal year, economic activity seems to have fallen to a lower growth path.

Contributing indicators to this observation are the growth slowdown in the rest of the world, limited YoY growth in manufacturing, high domestic inflation, eroding real incomes, and raising production costs.

According to the balance of payments data, the trade deficit in goods and services expressed in dollars declined marginally in July. Both exports and imports gained strength.

For the coming months, the baseline scenario was moderation in imports, following a slowdown in domestic growth.

At the same time, exports would stabilise and as a result, the trade balance could be expected to improve.

Remittances were expected to stabilise at around current levels.

This together with the expected path of the trade balance and other primary and secondary income transactions would guide the current account balance towards further improvement.

“But that scenario may be perturbed significantly by the consequences of the recent floods,” the report said, “These may limit export capacity and at the same time require more imports to satisfy the demand for products and harvests foregone.”

The report highlighted that the budget for FY2023 was prepared to achieve the goals of stabilizing economic growth, increasing revenues, rationalizing expenditures through prudent expenditure management, enhancing exports, and protecting the vulnerable segments of society through relief measures and pro-poor initiatives.

However, the economy of Pakistan had been affected severely by widespread destruction brought about by extreme flooding. Consequently, there would be a detrimental impact on the government's fiscal situation from both the revenue and expenditure sides.

Credit : Independent News Pakistan-WealthPk