April 28, 2021 (MLN): Inflation is expected to remain between 8.0-9.5 percent in April. However, from the beginning of the next fiscal year, assuming the absence of any new supply shocks, favourable base effects may start to drive YoY inflation to lower levels, said the Finance Ministry in its monthly Economic Outlook bulletin.
To note, the central bank projected an inflation range of 7-9 percent for the current fiscal year.
The Consumer Price Index (CPI) increased by 9.1 percent on a YoY basis in Mar 2021 as compared to 10.2 percent in Mar 2020 mainly due to an increase in prices of food items, clothing and footwear. On average it was recorded at 8.3 percent in the first nine months of the current fiscal year as against 11.5 percent during Jul-Mar FY 2020.
In its April 2021 Monthly Economic Update and Outlook, the ministry said that a few consumer items, as well as energy prices, slightly pushed up inflation in Mar 2021. The government has imported wheat and sugar to bridge shortfalls and improve supplies in the market. Historically it has been observed that in Ramzan, due to market imperfection, inflationary pressures are observed.
However, it is expected that recent government interventions to improve the functioning of domestic foods markets and the assuring of sufficient supply to some of these markets are expected to be permanent measures. Thus, not only affecting the CPI level but also future inflation is expected to come down as compared to the scenario when these measures would not have been taken.
On the fiscal front, the report said the fiscal sector continues to perform better as a result of the government's efforts to maintain fiscal discipline through careful expenditure management and efforts to improve the revenues despite higher mark-up payments and COVID-related expenditures.
The ministry said the fiscal deficit has been contained to 3.5 percent of GDP during July-Feb, FY2021 against the deficit of 3.7 percent of GDP last year.
The bulletin mentioned Federal Board of Revenue (FBR), at the start of the year, had adopted a home-grown, well-thought-out, and enforcement-oriented Smart Taxation Model, which implied pursuing revenue where it was latent. It allowed Tax Administration to continue focusing on long-term objectives like the economy and broadening of the tax base, in search of substantive revenue numbers. It has shifted focus to identify about 3,500 big revenue yielding taxpayers –multinationals and big corporates, cluster them under a standardized, focused and professionally oriented audit space, impose a tax, get adjudicated, and then collect it.
The current revenue performance is expected to improve further during the last quarter of FY2021 relative to the same period of FY2020 when economic activities were interrupted due to COVID-19. FBR tax collection witnessed a double-digit growth during the first nine months of FY2021 i.e., up by 10.9 percent to Rs 3395 billion against Rs 3060 in the same period last year. It is a reflection of growing economic activities in the country despite facing the challenge of the third wave of COVID-19, the outlook added.
With timely appropriate measures taken by the government to tackle the third wave of the pandemic, risks are mitigated thus better prospects of economic growth are visible, it said.
The LSM index is exposed to external conditions. In Feb 2021, the LSM index, measuring industrial activity, increased by nearly 4.9 percent on a YoY basis. Ministry hoped YoY LSM growth remain strong in the coming months. In the same period last year, the international and domestic spread of the COVOD-19 virus had depressed industrial activity and LSM declined by 21 percent in Mar 2020. Although Pakistan currently experiences the third wave of virus infections, it may not depress industrial activity as much as it did during the same period last year, the report cited.
On the external sector, the ministry foresaw exports of goods and services in April to exceed the level observed in Mar 2021 ($ 3.2 billion) mainly due to export-oriented Government policies and strong economic recoveries in the main export markets. Imports are expected to remain above the current level, driven by the domestic economic recovery. Since remittances are expected to remain high due to Eid, it is expected that the current account next month will remain near equilibrium.
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