Govt taking measures to keep growth momentum intact: Outlook

Economic growth remained positive, but restrictive demand management and high inflation may cause Pakistan’s cyclical position to deteriorate in the coming months: Economic Update and Outlook for August 2022

Karachi, August 26, 2022: The government is taking all possible measures to counter high inflationary and external sector pressures so that the growth momentum may remain intact, says Monthly Economic Update and Outlook for August 2022.

“The economy of Pakistan is going through high inflationary and external sector pressures due to higher commodity prices both in the international and domestic market and exchange rate depreciation (YoY),” the report launched here on Thursday said.

Inflation has continued to accelerate in recent months, mainly due to supply shocks that have created very significant monthly impulses on the Consumer Price Index (CPI) level.

If these monthly impulses can be contained to more normal levels in future months, inflation may start to decelerate, the report says adding but even then, Year-on-Year (YoY) inflation may stay in double digit for rest of the current fiscal year.

According to the report, economic growth remained positive, but restrictive demand management and high inflation may cause Pakistan’s cyclical position to deteriorate in the coming months.

This cooling off may bode well for the trade balance and by extension for the current account balance, official reserves, and the exchange rate.

On the other hand, recessionist tendencies in Pakistan’s main export markets may contain exports. Furthermore, Pakistan’s NEER (nominal effective exchange rate ) has significantly depreciated in recent months, and its REER (real effective exchange rate) appreciated again in June.

The current account balance is expected to improve considerably in the coming months while the new agreement with the International Monetary Fund (IMF) ensures that Pakistan’s external financing needs will be met.

This opens room for further implementation of supply-side policies that should elevate Pakistan’s potential growth rate to a higher sustainable level.

One essential necessary condition for this to happen is a drastic increase in Pakistan’s propensity to invest. Physical and human capital accumulation and productivity enhancement are the essential ingredients to upgrade Pakistan’s sustainable long-run growth path.

It says, the economic outlook was surrounded by global and domestic uncertainties. Geopolitical tensions remain unabated, worldwide inflation remains high, interest rates show tendencies to rise, and the US dollar strengthens.

Pakistan’s external environment is therefore facing increasing challenges while domestically, the government has taken necessary measures to comply with IMF requirements.

These have further increased inflation, but also have the positive effect of alleviating the external financing constraints.

Recent floods caused by abnormally heavy monsoon rains has adversely affected important and minor crops which may impact the economic outlook through agriculture performance.

The Fear-on-Year and Month-on-Month inflation have been accelerating drastically in June and July. The main drivers were seen to be the pass-through of high international commodity prices and exchange rate depreciation into domestic retail prices.

On the other hand, during the last 12 months, money supply growth was compatible with a low and stable inflation rate. But the recent supply shocks have brought the CPI to a level much higher than one year ago.

Taking into account, the expectation that domestic retail prices may further increase in August 2022 compared to July 2022, even if there would not be any further MoM increase in August 2022, YoY inflation will settle at nearly the same level as the one observed in July 2022.

During the past month, FY2022-23, FBR surpassed the target of Rs 443 billion by Rs 15 billion. The provisional net collection represents a growth of 10.2 percent to stand at Rs 458 billion during July FY2022-23 against Rs 416 billion in the comparable period of last year.

The performance clearly reflects FBR’s continuous efforts to maintain the growth trajectory established last year.

Meanwhile, despite global and domestic headwinds, FY2022 ended well for the LSM with a growth of 11.7 against 11.2 percent in the last year.

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