January 28, 2021 (MLN): Pakistan’s current outlook ensures economic revival on the basis of continued recovery as Monthly Economic Indicator (MEI) showed strong growth in December, in continuation with what was observed in the previous five months but there is a possibility of slower economic activities especially in services sector depending on the intensity and duration of a pandemic.
The Finance Ministry, in its monthly Economic Update and Outlook for January 2021 highlighted that Pakistan’s economy consecutively had suffered from the BOP crisis and the COVID-19 pandemic had kept the economy below its potential level. However, since the start of the current FY, the economy has started recovering because of the government’s effective initiatives and administrative measures to counter the challenges posed by COVID-19.
The monthly bulletin showed that Pakistan’s fiscal deficit stood at Rs 822 billion (1.8% of GDP) during the first five months of FY2021 as compared to 1.6% of GDP last year. Net federal revenues witnessed a noticeable increase of 22.2% (1,391 billion) for Jul-Nov, FY2021 (Rs1138 billion last year). Within revenues, non-tax posted a healthy growth of 17.7% while total federal expenditures grew by 14.5% to Rs 2383 billion during July-Nov, FY2021 (Rs 2081 billion last year).
On the development side, the rupee component of PSDP increased by 11.3% to Rs128 billion (Rs 115 billion last year) in utilization during the period.
On the other hand, inflation slowed down. Intense measures for smoothing supply, removing market abnormalities helped in reducing inflationary pressure even in the presence of accommodative fiscal & monetary policies. The recent developments showed that both YoY and MoM inflation are on a downward trend as the headline inflation (CPI) was recorded at 8.6% for Jul-Dec FY2021 against 11.1% last year.
In recent months, oil prices have been very volatile, international food prices have been rising. However, exchange rate movements remained almost neutral. The impact of rising international food prices was mitigated by Government policies focusing on improving the supply stream of food products and improving the functioning of domestic food markets. It is expected that the declining trend in YoY inflation will continue in January within a range of 7.2 to 8.2%.
Industrial activity measured by the LSM index is the sector that is most exposed to external conditions. Fig- compares the year-on-year growth rate of LSM with the weighted average Composite Leading Indicators in Pakistan’s main export markets. In recent months, both CLI and YoY growth rate of LSM show positive development. In every month since July 2020, the YoY growth rate of LSM was positive. In recent months LSM continues to recover from the COVID-19 crises as LSM growth increased by 7.4% during Jul-Nov FY21, the report said.
Meanwhile, the sudden surge in imports due to the increase in international oil prices and import of additional food products enhanced imports by $ 1.2 billion alone in Dec 2020($ 5.0 billion) compared to Dec 2019 ($ 3.8 billion). However, there was no pressure on foreign reserves as the Current Account remained in surplus for H1 FY 2021.
Looking forward, depending on these explanatory factors, imports may remain $ 4.5 – $ 5.0 billion in next month. Exports are expected to stabilize around current levels. But in the baseline scenario, the trade balance is not expected to further deteriorate. Remittance inflows remain strong and continue to provide strong support to the financing of the trade deficit, the report added.
Fiscal performance remained satisfactory. Currently, the fiscal policy actions are primarily concentrated on relief measures to support businesses stay afloat and to protect vulnerable segments of society. At the same time, the government is focused on containing the fiscal deficit at a manageable level and keeping the primary balance at a sustainable level.
The Finance Ministry said the restoration and acceleration of Pakistan’s productive capacity is a necessity to ensure high and sustainable growth in the near and longer-term. In the near future, the economic recovery is expected to translate into more productive investment expenditures. The Government is committed to motivating investments in crucial sectors of the economy to enhance productive capacities and to stimulate economic growth.
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