ISLAMABAD- The Ministry of Finance (MoF) has observed that overall economic recovery is on its way and may accelerate in the coming months as industrial sector has started showing robust growth. 

“The timely measures of the government are supportive in spurring economic growth, decelerating inflation and at the same time preserving external balance,” the Ministry of Finance has noted in its Monthly Economic Update & Outlook. It added that prospects of economic growth are showing visible signs of improvement during seven months (July-January) of the current fiscal year (FY 2021) which strengthen expectations about economic recovery.

The government’s timely measures against the pandemic in terms of fiscal stimulus, easing mobility restrictions, timely arrangement of vaccination, together with accommodative monetary policy allowed economic activities continue in the difficult time. The report stated that the resurgence of the COVID-19 infection placed considerable strain on the fiscal side of the economy during the first half of the current fiscal year. Despite significant challenges, the revenues side performed better on the back of improved tax collection both at the federal and provincial level. The performance is an indication of growing economic activity even in the wake of challenges posed by second wave of the pandemic. This implies that, as economic activity accelerates further, there would be more increase in revenues. On the other hand, the expenditure side is expected to remain under pressure due to COVID related expenditures.

The Ministry of Finance believed that Pakistan’s trade balance is expected to show further improvement as compared to the two previous months. After a very strong monthly, increase in December 2020, partly due to seasonal effects, imports came back to the normal levels in Jan 2021, resulting in a MoM improvement in the trade balance. Although they remain supported by the ongoing economic recovery and further increases in international commodity prices, imports in February 2021 are expected to remain lower or at around the same level observed in Jan 2021. On the other hand, incentives provided to export-oriented industries, exports are expected to kick off up to a higher level. Regarding remittance inflows, these remained strong and still expected to provide support to finance trade deficit.

Recent developments in inflation, shows that, both YoY and MoM inflation is on a negative trend in recent months. Recently, the government implemented policy measures to improve the market mechanism of food commodities and to re-enforce the supply chain of essential food items. These interventions were successful to prevent uptick in prices of daily use items. It is expected that due to much needed structural measures, the downward trend of prices of these items will be permanent. In that case, the downward shift in the CPI level will induce derived effects such as lower indexations of other prices and wages, lower production costs, lower inflation expectations, etc. These second-round effects are mutually reinforcing and therefore not only the CPI level but also the future inflation rate may follow a lower path than what would otherwise have been if these policy measures were not taken. However, international commodity prices are recently on a rising trend, especially oil prices and food prices. Furthermore, around the same period one year ago, commodity prices were low and the CPI level actually declined. Taking all these observations into account, YoY inflation for next month may remain between 5.5−7.5 percent.

FBR has provisionally collected Rs 2572 billion during Jul-Jan, FY2021 against Rs2426 billion in the same period last year, posting a growth of 6.0 percent. The net collection has exceeded the target by Rs 22 billion. Domestic tax collection increased by 6.2 percent to Rs2173 billion in the first seven months of FY2021 against Rs 2046 billion in the comparable period of last year. Within domestic, direct tax grew by 5.0 percent, sales 7.8 percent and FED increased by 2.8 percent during Jul-Jan, FY2021 over the same period of last year. For the month of January, the net tax collection recorded a growth of 12.5 percent to accumulate Rs366billion, while it exceeded the target by Rs 26 billion in the month of Jan 2021.

The current account posted a surplus of $0.9 billion (0.6 percent of GDP) for Jul-Jan FY2021. In Jan 2021, current account deficit remained $229 million due to imports of essential food items, capital goods, oil, and industrial raw material owing to the domestic economic recovery. As per PBS, exports during Jul-Jan FY 2021 increased by 5.6 percent to $14.3 billion ($13.5 billion last year). Pakistan’s exports grew by 8.8 percent ($ 2.1 billion) in Jan 2021 ($1.9 billion last year). The textile sector exports increased by 8.2 percent over the last year. Value added exports increased by 13.4 percent. The decrease in quantities of value-added exports was compensated by higher unit price. The total imports in Jul-Jan FY2021 increased to $29.3 billion ($ 27.3 billion last year), thus grew by 7.2 percent. The petroleum group decreased by 20.9 percent while import of petroleum crude decreased by 26 percent in value and increased by 14.7 percent in quantity. Import of petroleum product increased by 43.2 percent (quantity) and decreased by 15.3 percent (value). The food group import jumped by 51.9 percent during Jul-Jan FY2021 and reached $ 4.6 billion ($3.0 billion last year). The government allowed import of wheat and sugar to bridge the local shortages.