March 1, 2021 (MLN): Prospects of economic growth are showing visible signs of improvement during July-Jan FY 2021 and would continue to show improvement in the second half of the current fiscal year, said the Finance Ministry.

In its Monthly Economic Update & Outlook report, the Ministry of Finance uplifted expectations about economic recovery during the ongoing fiscal year based on improved signs in the first seven months.

The Ministry claimed that the government’s timely measures against the pandemic in terms of fiscal stimulus, easing mobility restrictions, the timely arrangement of vaccination, together with accommodative monetary policy allowed economic activities to continue in the difficult time.

“Thus, it is observed that overall economic recovery is on its way and may accelerate in the coming months. Especially industrial sectors have started showing robust growth,” the outlook said.

The recent developments in inflation show 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.

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, the Ministry said.

According to the report, 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.

Taking all these observations into account, the Ministry of Finance projected YoY inflation for the month of February’21 may remain between 5.5−7.5 percent.

With regards to the agriculture sector, the report was of the view that downside risk to cotton production still persists, however it is expected that better production of other Kharif crops will mitigate the risk. Further, for Rabi season 2020-21, wheat crop production is expected to achieve the production target as almost 99 percent target area has been sown.

As per the monthly outlook, in the industrial sector, since July 2020, the YoY growth rate of LSM remained positive on monthly basis. Industrial activity is recovering from two consecutive crises. The BOP crises necessitated policy adjustments to curb unsustainable external deficits which depressed LSM in 2019. The COVID-19 pandemic required measures to preserve peoples’ health which caused industrial output to fall significantly especially in March, April, and May 2020.

However, the Monthly Economic Indicator (MEI), which is based on combining monthly data of indicators that are proven to be correlated with GDP at constant prices shows continued strong growth in January, in continuation with what was observed in the previous seven months.

“It follows that economic growth has been strong throughout the first half of the current fiscal year and will continue to show improvement in the second half of the current fiscal year,” the outlook said.

On the external front, Ministry noted that after a very strong MoM increase in Dec 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 Feb 2021 are expected to remain lower or at around the same level observed in Jan 2021.

On the other hand, with incentives provided to export-oriented industries, exports are expected to kick off up to a higher level. As a consequence, in the baseline scenario, the trade balance is expected to show further improvement as compared to the two previous months, i

Regarding remittance inflows, these remained strong and still expected to provide support to finance trade deficit, report cited.

Commenting on the fiscal side, the Finance Ministry said 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 levels. The performance is an indication of growing economic activity even in the wake of challenges posed by the 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.

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