ISLAMABAD - The Ministry of Finance has identified five main challenges confronting with Pakistan’s economy including higher inflation and external deficit, currency depreciation, declining foreign exchange reserves and mounting uncertainty.
“Pakistan is currently facing several severe challenges: accelerating inflation, high external deficits, exchange rate depreciation, declining foreign exchange reserves and mounting uncertainty,” noted ministry in its ‘Monthly Economic Update & Outlook May 2022’. It stated that economic growth remained relatively high at 5.97 percent, but in the presence of macroeconomic imbalances may not be sustainable.
The ministry has projected inflation rate at higher side, expected to remain between 12.5 and 13.8 percent for the ongoing month (May). Inflation in Pakistan is driven by both external and internal factors. International commodity prices, especially oil and food prices are the main external sources of inflation. In recent months international commodity prices accelerated. Since January 2022, the monthly increase of international oil prices was on average nearly 10 percent per month. The international food price index registered average MoM increase by nearly 6 percent per month. The international commodity prices witnessed upward trend as a consequence of Russia Ukraine conflict. But in the current circumstances the USD strengthened against many currencies, including the Pakistani rupee. These cost push external inflation impulses not only increase domestic prices but also have longer term second round effects. It is commonly accepted that such second round effects are combated with restrictive fiscal and monetary policies. Since January 2022, the average MoM increase in Pakistan’s inflation was 1 percent per month.
For the coming months, it is expected that the import content of domestic growth would subside somewhat, backed by restrictions on unnecessary imports. Furthermore, a slower potential economic growth in the coming months may contain the import bill. On the revenue side, assuming a constant REER, the export content could stabilize at around current levels. These projections imply an improvement in the balance of trade in goods and services. Though the remittances surged in April due to the Eid factor they may return to normal trend in the coming months. Taking into account all other secondary and primary income payments and receipts, the current account deficit is expected to stay well below the 1.0 billion USD mark in the coming months.
According to the ministry, it is expected that the expenditure side would come under further pressure in the remaining months of the current fiscal year. On the revenue side, tax collection currently is 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.
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. 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.
“Pakistan is currently facing several severe challenges: accelerating inflation, high external deficits, exchange rate depreciation, declining foreign exchange reserves and mounting uncertainty,” noted ministry in its ‘Monthly Economic Update & Outlook May 2022’. It stated that economic growth remained relatively high at 5.97 percent, but in the presence of macroeconomic imbalances may not be sustainable.
The ministry has projected inflation rate at higher side, expected to remain between 12.5 and 13.8 percent for the ongoing month (May). Inflation in Pakistan is driven by both external and internal factors. International commodity prices, especially oil and food prices are the main external sources of inflation. In recent months international commodity prices accelerated. Since January 2022, the monthly increase of international oil prices was on average nearly 10 percent per month. The international food price index registered average MoM increase by nearly 6 percent per month. The international commodity prices witnessed upward trend as a consequence of Russia Ukraine conflict. But in the current circumstances the USD strengthened against many currencies, including the Pakistani rupee. These cost push external inflation impulses not only increase domestic prices but also have longer term second round effects. It is commonly accepted that such second round effects are combated with restrictive fiscal and monetary policies. Since January 2022, the average MoM increase in Pakistan’s inflation was 1 percent per month.
For the coming months, it is expected that the import content of domestic growth would subside somewhat, backed by restrictions on unnecessary imports. Furthermore, a slower potential economic growth in the coming months may contain the import bill. On the revenue side, assuming a constant REER, the export content could stabilize at around current levels. These projections imply an improvement in the balance of trade in goods and services. Though the remittances surged in April due to the Eid factor they may return to normal trend in the coming months. Taking into account all other secondary and primary income payments and receipts, the current account deficit is expected to stay well below the 1.0 billion USD mark in the coming months.
According to the ministry, it is expected that the expenditure side would come under further pressure in the remaining months of the current fiscal year. On the revenue side, tax collection currently is 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.
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. 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.
