ISLAMABAD: The ministry of finance on Tuesday said the high economic growth of Pakistan may not sustainable due to macroeconomic imbalances.
In its monthly review, the ministry said Pakistan is currently facing several severe challenges: accelerating inflation, high external deficits, exchange rate depreciation, declining foreign exchange reserves and mounting uncertainty.
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On the other hand, economic growth remains relatively high, but in the presence of macroeconomic imbalances may not be sustainable.
The primary contributors of increasing inflation are the surge in international commodity prices and the massive exchange rate depreciation.
In fact, the depreciation of the rupee both against the US dollar and on a trade weighted basis against the currencies of Pakistan’s main trading partners is primarily reflection of inflation differential between Pakistan and its main trading partners.
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Further relatively high domestic inflation is compensated by Rupee depreciation. However, currency depreciation itself feeds into higher domestic inflation.
In this sense, Pakistan is caught into a vicious inflation/currency depreciation spiral. In the short run a predicament to stop this cycle is to pursue restrictive fiscal and monetary policies, coupled with policies and announcements that restore market agent’s confidence.
In the longer run, Pakistan’s main problems can be solved by designing a credible sustainable future economic trajectory that inspires consumers and investors’ confidence. Economic decisions are based on expectations about the future economic path as well as on the degree of certainty/confidence of development prospects.
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An important component of such process is supply oriented policies. Pakistan’s propensity to invest is much lower compared to high growing emerging market and developing countries.
Accelerating the share of Gross Fixed Capital Formation in GDP would create additional production capacity to meet the increasing demand of consumers and producers. Such supply-oriented framework designed to reallocate the use of national income from consumption to investment expenditures, may be accompanied by suitable demand management policies.
The ministry said that fiscal deficit in the first nine months has increased to 3.8 percent of GDP against 3.0 percent recorded in the same period last year.
An increase in deficit has been observed on account of the higher expenditures due to the rise in subsidies and grants. It is expected that the expenditure side would come under further pressure in the remaining months of the current fiscal year.
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On the revenue side, tax collection currently showing a remarkable performance by posting a growth of 29 percent during the first ten months of the current fiscal year.
The first ten months’ data shows that the revenue collection has surpassed the target by Rs.237 billion. This is despite tax relief measures which have impacted revenue collection by approximately Rs 73 billion just in the month of April 2022.
FBR has taken various policy and administrative measures which paid off in terms of improved tax collection during the current fiscal year. It is expected that with the current growth momentum, FBR would be able to achieve its target during FY2022.
