June 28, 2021 (MLN): Pakistan’s current account balance is expected to show a deficit of around $0.5 billion by the end of the current fiscal year, Finance Ministry stated in its June 2021 Monthly Economic Update and Outlook.
On an account of 29.4 percent growth in Workers’ Remittances and 10.3 percent growth in Exports, the Ministry of Finance (MoF) noted that the Current Account posted a surplus of $153 million (0.1 percent of GDP) for July-May FY2021.
It is worth mentioning that exports on fob were recorded $2.1 billion in May 2021 ($1.2 billion last year) thus posting a growth of 69.0 percent YoY basis. The total imports in July-May FY2021 increased to $50.0 billion ($40.8 billion last year), thus posted 22.5 percent growth.
‘Economic growth is accelerating in the last quarter of the current FY. This is expected to continue the recently observed positive trend in imports of goods and services. These imports may exceed the level of the previous month. Fortunately, the growth momentum is also reflected in an expected strengthening of the export performance. Exports of goods and services are expected to exceed $ 3 billion in June 2021. With Imports expected to be about double the level of exports, the trade balance may settle at around $3 billion,’ the ministry stated.
The trade deficit together with the structural deficit in the Primary Income Balance (on average $0.4 billion per month over the last 10 months) is largely financed by the inflow of Remittances (on average $2.43 billion per month in the last 11 months) and other Secondary Income receipts from abroad (on average $0.35 billion over the last 10 month). Taking all these into account, the current account balance is expected to show a deficit of around $0.5 billion by the end of the current fiscal year.
On the fiscal side, Pakistan’s fiscal deficit has been reduced to 4.2 percent of GDP during July-April FY2021 i.e., 1.1 percentage points lower than the last year. The fiscal consolidation efforts continue to remain on track throughout the year in the backdrop of significant growth in tax revenues and prudent expenditure management.
The ministry of finance expects the fiscal deficit for the entire fiscal year will remain within the target. For FY2022, the fiscal deficit is budgeted to be at 6.3 percent of GDP.
The primary balance continues to remain in surplus and recorded at Rs 159 billion (0.3 percent of GDP) against the deficit of Rs 205 billion (0.5 percent of GDP) last year.
The first ten months of the current fiscal year witnessed a 10.5 percent increase of Net federal revenue receipts to Rs 2769 billion against Rs 2505 billion in the comparable period of last year. On the other hand, the total expenditure increased by 2.3 percent to reach Rs 5196 billion against Rs 5078 billion in the same period of last year.
FBR tax collection has increased around 18 percent in the first eleven months to Rs 4,170 billion as compared to Rs 3,549 billion in the comparable period of last year, surpassing the target set for eleven months of the current fiscal year. It is expected that FBR would be able to improve the tax collection significantly above the level achieved last year.
The ministry said that inflation is mainly dependent on fiscal and monetary policies, international commodity prices, the USD exchange rate, seasonal factors and economic agents’ expectations concerning future developments. The CPI inflation decelerated to 10.9 percent in May 2021 compared to 11.1 percent in the previous month due to a fall in fuel, electricity and food prices. During July-May FY 2021, consumer inflation was recorded at 8.8 percent compared to 10.9 percent in the corresponding period a year earlier.
The monthly outlook said that the expected inflation for June can be decomposed into two effects: a base effect and new MoM price impulses. If in June 2021 no new MoM price impulses occur, the YoY inflation rate would settle around 9.8 percent. It is expected that deceleration will occur as compared to May 2021.
In June, new price impulses may come mainly from the recent increase in international food and oil prices, following the observed strong recovery of the world economy. But due to Government interventions, the pass-through into the domestic price is expected to be limited. Thus, on a YoY basis, it is expected that inflation in June 2021 to settle within probability margins of (8.8 – 10.2 percent).
The ministry report highlighted that the Industrial activity, measured by the LSM index is the sector that is most exposed to external conditions. April’s YoY increase in LSM (with 68.1 percent) was exceptionally strong, also taking into account that seasonal factors usually significantly depress LSM activity in this month. This formidable industrial expansion essentially reflects two factors. The first one is the low base effect due to the slump in LSM one year ago when the first wave of the COVID-19 pandemic hit the world economy as well as domestic activity gravely. Secondly, the strong vigor of the recovery in Pakistan’s economy helped by prudent fiscal and monetary policies.
The April Monthly Economic Indicator (MEI) shows very strong growth, mainly on the back of the strong expansion in industrial activity. This tendency is expected to have continued in May. On the basis of the expected performance of LSM in the remaining months of FY2021, the acceleration of the MEI is expected to continue. Thus, the annual GDP growth may exceed the provisional figure released by PBS in May 2021.
Pakistan's economy has shown significant signs of economic recovery with the fast resumption of economic dynamism. In the recent budget 2021-22, the government has taken growth-oriented initiatives and will continue to follow the positive reform momentum which will help to boost the competitiveness of Pakistan’s economy and lay a strong foundation for a more robust, inclusive and sustainable recovery.
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