May 29, 2021 (MLN): Despite the third wave of COVID-19, Pakistan has ended up achieving 3.94 percent GDP growth in FY2021, higher than the target after more than 15 years mainly in the backdrop of timely and appropriately formulated policy measures taken by the government.
This growth indicates that economic recovery has not only started but based on the major macroeconomic indicators, Pakistan is on the path of sustainable growth. The confidence of investors has been restored due to pro-business policies and major structural imbalances are in check, said the Finance Ministry in its monthly Economic Outlook.
The outlook said that inflation is expected to remain between 9- 9.8% in May. However, from the beginning of the next fiscal year, assuming the absence of any new supply shocks and continued Government monitoring of smooth functioning of markets in essential products, inflation is expected to continue to decelerate in the coming months as well, said the Finance Ministry in its monthly Economic Outlook.
On the other hand, the central bank predicted an inflation range of 7-9 percent for the current fiscal year.
The Consumer Price Index (CPI)-based inflation increased by 11.1 percent on a YoY basis in April 2021 as compared to an increase of 8.5 percent in April 2020, mainly due to an increase in prices of food items and clothing and footwear. On average it was recorded at 8.6 percent in the first ten months of the current fiscal year as against 11.2 percent during Jul-Apr FY 2020.
In its May 2021 Monthly Economic Update and Outlook, the ministry said that the international market prices of Palm oil and Soybean oil prices, Crude Oil and Tea have increased and ultimately passed through impacts in the domestic inflation. Inflationary pressures were observed in Ramadan due to seasonally higher demand for essential commodities. However, it is expected that government measures will contain inflation in the coming months.
On the fiscal front, the report highlighted that during July-Mar, FY2021, the fiscal deficit contained 3.5percent of GDP against 4.1 percent of GDP (revised) in the comparable period of FY2020. Similarly, the primary balance posted a surplus of Rs451.8billion (0.9 percent of GDP) during July-March, FY2021 against the surplus of Rs193.5bn (0.5 percent of GDP) in the same period of FY2020.
With respect to revenues, the ministry informed that total revenues grew by 6.5 percent to Rs4,992.6bn in July-Mar, FY2021 against Rs4,689.9bn in the comparable period of last year. Within revenues, tax collection increased by 11.9 percent to Rs 3,765.0 billion during Jul-Mar, FY2021 against Rs3,365.5bn in the same period of FY2020.
While total expenditures grew by 4.2 percent during Jul-Mar, FY2021 to Rs6,644.6bn against Rs6,376.1bn in the comparable period of last year.
During the said period, the fiscal sector witnessed considerable improvement on the back of efficient expenditure management and an effective resource mobilization strategy which helped in containing the fiscal deficit at 3.5 percent of GDP. The report further indicated that risks still persist amid the third wave of the corona, especially, on the revenue side.
To combat the increase in COVID 19 cases during Eid ul Fitr, the government took swift action, including restricting business activities except for essential services. This has impacted tax collection but FBR is confident to perform better in the remaining two months of the current fiscal year, the report highlighted.
The bulletin mentioned that the provisional net revenue collection by the Federal Board of Revenue (FBR) grew by 14.4 percent to Rs3780bn during Jul-Apr, FY2021 (Rs3,303bn last year).
The report further mentioned that the provisional net collection surpassed the target of Rs3,637bn. Within the total collection, direct tax grew by 11.2 percent, sales tax 18.1 percent and FED 8.4 percent.
The considerable amount of collected tax is mainly due to the adopted home-grown, well-thought-out, and enforcement-oriented Smart Taxation Model by FBR in earlier months, 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.
To note, revenues under customs duty grew by 14.9 percent during the period under review.
Industrial activity, measured by the LSM index is the sector that is most exposed to external conditions. In March 2021, the LSM index increased by 22.4percent YoY but declined by 7.7percent compared to February 2021. This MoM decline was expected on the basis of cyclical and seasonal patterns observed in the past due to crushing activity that has completed.
A continued strong positive YoY growth in LSM is expected in the month of May. In the same period last year, the international and domestic spread of the COVOD-19 virus had depressed industrial activity: LSM declined MoM by 32.7percent in April 2020. Although Pakistan currently experiences the third wave of virus infections, it is not expected that it depresses industrial activity as much as it did during the same period last year, the report cited.
On the external sector, both exports and imports of goods and services are currently significantly higher than their respective values at the beginning of the current fiscal year. As total exports for 10MFY21 stood at $21bn, depicting an upsurge of 6.54% while import bill valued at $42.3bn during the same period. These trends reflect the foreign and domestic rebounds in economic activities.
Another important development is that since the start of the current FY, remittances settled at historically high levels. Taking into account the primary income balance and other secondary income transactions (other than remittances), the current account balance recorded a surplus of $800mn during the first ten months of the current FY, a significant turnaround from the $4.7bn deficit during the same period last year.
The ministry expected exports of goods and services in the coming months to settle above the $3bn mark showing a positive trend. Depending on the trend in remittances, the current account balance may remain in surplus or approximate balance.
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