July 29, 2021 (MLN): Large Scale Manufacturing (LSM) Index is likely to return to positive growth on a sequential basis in June-21 due to seasonal effects.
In a recent report “Monthly Economic Update & Outlook July 2021”, Finance Ministry noted that the last quarter of the fiscal year is marked with negative growth of LSM (MoM) due to seasonal effect. On a YoY basis, recent months have shown significant LSM growth rates, as it witnessed 36.8 percent growth on a YoY basis in May FY 2021 (-25.5 percent in May FY 2020). It is expected that it will continue in July. This reflects low base effects, but also the strong momentum of the current economic expansion.
LSM production has surpassed its pre-COVID level during July-May FY2021 and clocked its fifteen-year high growth rate of 14.6 percent as compared to the 10.2 percent slump last year. The report highlighted that the Monthly Economic Indicator (MEI) also showed strong growth for April and May 2021, mainly on the back of the expansion in industrial activity.
As indicated by the MEI, economic growth momentum has strengthened considerably since March and has remained robust during the last quarter of FY2021. BOP data revealed strong expansion of imports of goods and services, especially in June. Imports in June 2021 increased by 1.6 billion USD as compared to May due to seasonal factors. It is expected that in the coming months, imports of goods and services may settle below the level observed in June.
The observed growth momentum is driven by the production side of the economy. This is also reflected in the exports of goods and services, which according to BOP data increased by about $ 0.5 billion in June as compared to May. It is expected that exports will remain at the same level and consequently trade balance in goods and services will improve in coming months. These expectations depend on the absence of unexpected shocks for example those that may be generated by the recently observed surge in domestic and foreign COVID-19 infections.
The remittances flow, the backbone of the country’s economy, is expected to continue its momentum in the coming months. Workers’ remittances continued their unprecedented streak of above $ 2.0 billion for the 13th consecutive month in June 2021. On a cumulative basis, it rose to $ 29.4 billion in FY2021 ($ 23.1 billion last year), registered a substantial growth of 27.0 percent, the fastest rate of expansion since FY2003. Taking these into account, as well as the other secondary income flows and the primary income flows, the current account is expected to remain in deficit slightly. These developments require further monitoring for the smooth continuation of economic activities, as per the ministry.
On the inflation front, the ministry observed that in recent months, the YoY inflation rate is on a declining trend. It is expected that this declining trend will continue in the absence of any major shock. MoM inflationary impulses in July can be considered as 2nd round effect of a previous increase in international commodity prices, from a recent increase in gasoline prices, currency depreciation and monetary expansion. Furthermore, the month of July tends to show a positive seasonal inflation effect.
On the other hand, international food prices declined in June and Government efforts to increase the efficiency of domestic food markets are still in place and are continuously being monitored and strengthened. The dividends of positive market intervention may ease the pressure on prices and as a result, YoY inflation in July 2021 is expected to decelerate keeping it in the range of 7.5 -9.0 percent.
The monthly report highlighted that the current fiscal performance is largely in line with the government’s strategy to ensure fiscal discipline, increasing revenues and controlling expenditures despite significant challenges. It is evident by the fact that fiscal deficit is contained at 4.6 percent of GDP during Jul-May FY2021 while the primary balance remained in surplus throughout this time. The government’s continuous efforts for resource mobilization are bearing fruits. FBR tax collection exceeded the target by Rs 41 billion during FY2021 owing to effective enforcement measures. Keeping in view the post-COVID economic recovery, it is expected that the revenue performance shall improve further in the new fiscal year.
The objective of recent accommodative monetary and fiscal policies is to put Pakistan’s economy on a higher growth trajectory. The economic recovery in Pakistan’s main exporting partners is making the external environment favorable. However, recent deadly floods in Germany, China, India, and North America may raise direct and indirect economic losses along the global supply and trade chains. Further, in the transition towards a higher potential growth level, pressure can be built on external accounts, the report cited.
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