Economy set to achieve higher, inclusive, sustainable economic growth in FY2022

ISLAMABAD – The Ministry of Finance on Tuesday noted that there are some downside risks to the outlook of Pakistan’s economy associated with rising international commodity prices, new variants of virus and geopolitical dynamics especially post August 15 scenario, emerging in Afghanistan.

“Due to the government’s growth oriented policies, Pakistan’s economy is set to achieve higher, inclusive and sustainable economic growth in FY2022. However, there are some downside risks to the outlook of Pakistan’s economy associated with rising international commodity prices, new variants of virus and geopolitical dynamics especially post August 15 scenario, emerged in Afghanistan,” the Ministry of Finance stated in its Monthly Economic Update Outlook September 2021. For long term enhancement and sustainability of economic growth, it is important that it is driven by the expansion of domestic production. Value-added creation generates income that can be spent on consumption and investment. Attaining sustainable higher growth path requires a much larger proportion of the value added to be directed towards gross fixed capital formation, instead of consumption. This can be managed by appropriate long term structural policies, which are being implemented by the government.

The Ministry of Finance stated that in the short term, sustainability of the current growth requires that the trade deficit remains manageable. In this regard, import dynamics are being closely monitored. Exports can benefit from the current domestic and foreign economic dynamism. It is mentionable that inflation in some of Pakistan’s main export markets is rising significantly. However, domestic inflation is expected to decline. Maintaining REER at current level, the need for depreciation of the rupee exchange rate is reduced significantly. The government policies for export promotion will also anchor for providing external sector stability.

The recent increase in international oil prices, imports of food products and especially the ongoing revival of economic growth have stimulated imports. Nevertheless, the August number for imports of goods and services was higher than expected. Consequently, the M-o-M fluctuations of imports (and also exports) are extremely volatile. In fact, the observed August imports number still falls within the 95 percent forecast probability margin. It will be important to observe whether this will continue to be the case in the months ahead. Otherwise, structural changes or special events away from the normal driving forces of imports may be at play. Given the continuing pace of economic recovery and the observed dynamism of recently observed import activity, imports of goods and services for the coming month are expected to decline from the August level. Exports of goods and services in August 2021 according to BOP data, were not far behind the expected $ 3 billion mark. For next month, the ongoing strong recovery in Pakistan’s main export markets, the momentum in domestic economic dynamism and specific government policies to stimulate exports are expected to get exports of goods and services above the $ 3 billion level and more in the subsequent months. These expected developments would reduce the balance on trade in goods and services around $ 3 billion in September 2021, as well as in the coming months. If remittances were to stabilize approximately $ 2.5 billion and taking into account the other secondary and primary income flows, the current account would remain in deficit but in manageable range. 

The Consumer Price Index (CPI) was recorded at 8.4 percent during Jul-Aug FY2022 as compared to 8.7 percent last year. Urban CPI was recorded at 8.5 percent as against 7.5 percent, while Rural CPI was observed at 8.2 percent as compared to 10.7 percent during the same period last. The risks that could raise inflation include higher trend in global commodity prices, especially food and energy items. However, the government is taking all possible measures to control inflationary pressures and provide relief to the masses in order to mitigate the impact of price hike. The government has decided to immediately reduce vegetable ghee/oil by Rs. 45-50 per kg to Rs. 290 from Rs. 340 and wheat flour to Rs. 55 per kg. Government has decided to increase wheat release price to Rs. 1950 per 40 kg from and flour mills would immediately start providing 20 Kg bag for Rs 1100. Government has further decided that sugar be available across the country at Rs. 89.75 per kg to provide relief to 40-42 percent population.

New price impulses in September may have been somewhat compensated by significant base effects. If no new inflationary impulses would have occurred in September as compared to August, YoY inflation may decelerate in September 2021. However, taking into account new price impulses in September and the low base effect, YoY inflation in September is likely to resume its declining trend observed in recent months. Based on current information, the September inflation rate is expected to end up between 7.5 percent to 8.4 percent. 

The fiscal deficit in terms of GDP contained at 0.4 percent (Rs 237.8 billion) in July FY2022 against 0.5 percent (Rs 211.6 billion) in the comparable period of last year. While the primary balance remained in surplus and stood at Rs 71.7 billion (0.1 percent of GDP) against Rs 55 billion (0.1 percent of GDP) during the period under review. In July, FY2022 expenditures under PSDP grew by 72 percent to Rs 25.3 billion against Rs 14.7 billion in the same period of last year.

During Jul-Aug, FY2022, net provisional collection grew by 42.3 percent, to Rs857.8 billion against Rs 602.6 billion in the comparable period of last year which is unprecedented. The provisional net collection surpassed the target of Rs 690.3 billion by Rs 167.5 billion. All the tax components registered a healthy growth. Direct taxes grew by 29.5 percent, sales tax by 52.7 percent and FED 19.3 percent. Similarly, customs duty recorded a growth of 48.9 percent during the period under review as compared to previous year. For the month of August 2021, provisional tax collection increased by 47.4 percent to Rs442.3 billion against Rs 300.0 billion last year.

The government’s efforts at fiscal consolidation, prudent expenditure management since FY2019 had a strong carry-over impact in FY2021. It is likely to continue in the current fiscal year. In the current budget, the government significantly increased development spending with a view to give a further boost to economic growth. For this purpose, various initiatives in almost all the sectors have been introduced. Similarly, the government is dealing with the 4th wave of pandemic through effective containment measures so that economic activities may not be disrupted. Moreover, the government is accelerating vaccine procurement so that a large number of people can be protected against the COVID-19 virus. Therefore, with higher development and COVID-19 related spending, overall expenditures may likely to come under pressure.

Article source: https://nation.com.pk/29-Sep-2021/economy-set-to-achieve-higher-inclusive-sustainable-economic-growth-in-fy2022