Indicators show further slowdown in Pakistan economy: Finance Ministry

Indicators show further slowdown in Pakistan economy: Finance Ministry

The economic indicators released by the finance ministry have shown that the Pakistan economy has slowed down even further.

The average Monthly Economic Indicator (MEI) for the first eight months of the current fiscal year 2022-2023 shows a decline in domestic economic activities, with factors such as a lack of industrial dynamism and accelerating inflation contributing to this trend. The erosion of purchasing power for both consumers and investors due to inflation is also evident in the negative growth rates of both exports and imports.

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The MEI is developed as a tool to distribute the past annual GDP numbers, as reported by the PBS, on a monthly/quarterly basis and to nowcast on that same frequency GDP growth for the FY in which the National Accounts are not yet available.

Despite challenges and uncertainties, economy is showing continuous signs of resilience as depicted through contained fiscal and current account deficit during the current FY.

Furthermore, Pakistan is currently confronted with a shortage in external liquidity. Through demand management policies, government is trying to limit the current account deficit, which will not transfer further pressure on dwindling reserves.

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Moreover, the Government is firmly inclined to successfully complete the IMF’s EFF program, which includes necessary policy measures and will bring additional relief to the financial account of the balance of payments.

The policy measures are intended to bring expenditures more in line with the income generated within the country. At fiscal front, Government is pursuing fiscal consolidation in order to reduce the overall fiscal deficit through expenditure management, austerity measures, and revenue mobilization.

Presently, the government is pursuing fiscal consolidation in order to reduce the overall fiscal deficit through a combination of expenditure management and revenue increase. These measures are paying o􀆿 in the form of improved fiscal accounts.

READ MORE: Pakistan inflation likely to surge by 34.5% in March 2023

The fiscal deficit has been reduced to 2.3 percent of GDP during Jul-Jan FY2023, down from 2.8 percent of GDP in the same period previous year, while the primary balance is in surplus due to significant decline in non-markup expenditures.

On revenue side, FBR tax collection currently growing at 18 percent despite unprecedented challenges due to slowdown in economic activity and import compression. However, the current performance indicates the resolve of the government to optimize the revenue collection and to achieve the full year target.

The fiscal consolidation is at the top of government’s stabilization agenda in order to tackle sizeable fiscal deficit. With prudent expenditure management and effective resource mobilization strategy, it is expected that FY2023 will observe a substantial reduction in overall fiscal deficit as a percent of GDP.

According to BOP data, the trade deficit in goods and services declined significantly by 30.8 percent on YoY basis; from $2.6 billion in Feb 2022 to $1.8 billion in Feb 2023. However, on MoM basis, it increased marginally to $1.8 billion compared $1.7 billion in Jan. Exports of goods and services decreased marginally on MoM basis to $2.77 billion as compared $ 2.8 billion in Jan. on YoY basis, it declined by 19.2 percent. Imports of goods and services has continued to contain and decreased by 24.2 percent on YoY basis.

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Remittances increased by 5.0 percent on MoM basis to $2.0 billion in February 2023 as compared $1.9 billion in January 2023, due to improved situation after narrowing down differences between the inter-bank and open markets, subsequent allowing adjustments of the exchange rate.

Other factor which contributes mainly in current account improvement for the month of February, is balance on primary income which contained by $200 million. Accordingly, current account deficit contained to $74 million as compared $ 230 million in January 2023.

For the month of March, it is expected that exports and imports will remain at current level due to slow growth in the major trading partners and contained domestic economic activities. However, remittances will probably further improve due to positive seasonal and Ramzan factor. Taking these factors into account, as well as other components, the current account deficit likely to remain on lower side.

LSM’s cyclical pattern is well positively correlated with the cyclical position of Pakistan’s main trading partners. In January, LSM activity came in marginally below expectations. Although the CLI in Pakistan’s main export areas remains below its neutral level, some stabilization in its current cyclical condition seems to appear in recent months.

This may bode well for domestic industrial production. But current monetary restriction and fiscal consolidation, both required to bring external and internal balance may cause further short run pain to the domestic economy, which also translates into domestic industrial production below its neutral capacity level. YoY growth of LSM is expected to remain negative in February while MoM LSM is expected to remain positive.

Inflation is expected to stay at elevated level owing to market frictions caused by relative demand and supply gap of essential items, exchange rate depreciation and recent upward adjustment of administered prices of petrol and Diesel.

Due to the lagged effect of floods, the production losses especially of major agriculture crops has not yet been fully recovered. Consequently, the shortage of essential items has emerged and persisted. Inflation may further jack up as a result of second round effect.

Another potential reason of rising price level is the political and economic uncertainty. The economic distress resulting from delay of stabilization program has exacerbated the economic uncertainty due to which inflationary expectations have remained strong.

Despite State Bank of Pakistan (SBP)’s contractionary monetary policy the inflationary expectations are not settling down. Moreover, the bulk buying during the month of Ramadan may cause demand supply gap and result into prices of essential items to escalate. However, the government is well cognizant of this and have already taken on board all provincial governments to ensure smooth supply of essential items.

Inflation in March may remain in upper bound as observed in the month of February. Recent monetary policy restrictions and e􀆿orts towards fiscal consolidation along with the administrative, policy and relief measures are expected to ease out the inflationary pressure by the end of the current fiscal year.

Wheat production largely depends on the prevailing climatic conditions. As witnessed last year, delay in rains and early heat waves are expected to adversely impact the wheat production. According to Pakistan Met Office the country might witness different spells of heat waves within upcoming months of April and May, 2023.

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