Mounting deficits, high inflation trap economy: Pak govt

INTERNATIONAL DESK: With fiscal deficit widening by more than 115pc in the first four months (July-October) of the current fiscal year, Pakistan’s Finance Ministry on Friday forecast the inflation to stay high — between 21-23pc — and economic situation faced with ‘severe headwinds’ during the current fiscal year.

“For FY23, economic growth is likely to remain below the budgeted target due to devastation caused by floods. This combination of low growth, high inflation and low levels of official foreign exchange reserves are the key challenges for policymakers,” alerted the MoF on Friday in its Monthly Economic Update and Outlook.

The report, prepared by the Economic Adviser’s Wing (EAW) of the MOF, reported that the overall fiscal deficit stood at 1.5pc of GDP (Rs1.266 trillion) during July-October 2022-23 as compared to 0.9pc of GDP (Rs587bn) last year.

The fiscal deterioration was because of higher expenditure growth on the back of higher markup payments while the government is facing the unprecedented challenge of providing relief to people in flood-hit areas.

It said the average CPI in the first five months (July-November) of FY23 remained 25.1pc compared to 9.3pc in the same period last year. “It is expected that CPI inflation will remain in the range of 21-23pc”, it said.

The current account posted a deficit of $3.1bn for July-November FY23 against a deficit of $7.2bn last year, mainly due to an improvement in the trade balance.

The current account deficit (CAD) shrank to $276 million in November as against $569m in October.

Talking about industrial sector, the MoF also conceded downward trends. Industrial activity, measured by the large-scale manufacturing (LSM) index output came in somewhat lower than expected in October as the sector was the most exposed to external conditions.

The situation on the LSM front has been attributed to several factors. Firstly, the weighted average cyclical output gap in Pakistan’s main trading partners remains in negative territory and continues to widen gradually, which implies a reduction of global demand.

Secondly, the impact of floods-induced destruction of agricultural output may start finding its way into the industrial sectors. Thirdly, Pakistan’s official foreign exchange reserves are at relatively low levels, necessitating restrictive monetary policy and other measures to limit imports.

The MoF expected the pressure on LSM likely to be sustained in November if the negative shocks are continuing to prevail and outpace the LSM output which may gain some momentum as sugarcane crushing starts in November.

The balance of payments data indicates that exports of goods and services increased by around 1.9pc in November as compared to October. Exports have now settled around $2.9bn and are expected to climb further to $3bn in the coming months. However, on a year-on-year basis, exports decreased by 12.7pc.

November’s balance of payments data further witnessed that the import of goods and services fell by 5.9pc month-on-month and a massive decline of 32pc year-on-year.

Contained domestic demand and higher domestic interest rates reflect in low imports for machinery, transport, textile, agri and other chemicals and metal groups. It is expected that imports will settle at further lower levels gradually in the coming months.

Along, stabilisation trend in international commodity prices, it is expected that the trade deficit will further improve in the coming months and settled down at significantly lower levels in the second half of the CFY.

Assuming targeted remittance inflows, the expected improvement in the trade balance will be reflected in declining current account deficits, such that these deficits remain manageable and comfortably financeable for FY23.

Striving for wheat target

The report warned that standing water due to recent floods may create problems in achieving the assigned wheat sowing target but said the federal and provincial governments were working hard and committed to enhancing wheat productivity.

In addition to a timely increase in Minimum Support Price (MSP), the government has taken several initiatives like awareness campaigns, extension services, subsidised and quality provision of inputs (seed and fertilisers), etc. are focused to enhance wheat productivity. (Dawn)