March 29, 2021 (MLN): The prospects of economic growth for the current fiscal year are showing visible signs of improvement, however, the third wave of the pandemic is posing some downward risks, said Finance Ministry in its monthly economic update and outlook report.
The report noted that the fiscal performance from Jul-Jan, FY2021 shows that the fiscal consolidation policy helped in preserving fiscal discipline, increasing revenues, and controlling expenditures. On the revenue side, the FBR tax collection continues to improve, having exceeded the eight-month target by Rs 17 billion.
Eight months performance indicates that the fiscal front will remain on track and the current fiscal year would end up meeting the set target. However, the increase in COVID infection and related containment measures may pose certain challenges, especially the expenditure side may come under pressure, it further added.
In its monthly economic outlook report, the ministry highlighted that the expectations of economic recovery are strengthening on the basis of improvement in business confidence evident from industrial growth. The government’s fiscal stimulus thus succeeded in improving economic as well as social prospects. Therefore, the State Bank of Pakistan in its recent Monetary Policy Statement is now projecting higher growth in FY 2021 compared to its previous anticipation. As the third wave of pandemic is posing downside risk, the government timely measures combined with the observance of SoPs by the general public will be helpful in continuation of economic recovery along with decelerating inflationary pressure and preserving external balance.
On the inflation front, the recent developments show that the declining trend observed in recent months was interrupted in February.Thus both YoY and MoM inflation increased. Recently, the Government implemented policy measures to improve the functioning of some segments of food market and to re-enforce the supply chain of particular food products. These interventions contribute to contain inflationary pressure in those markets. These measures have dampened the direct impact and the expected second-round effects on other CPI components. On the other hand, international commodity prices are recently on a rising trend. In the last four months, oil prices and international food prices have been rising continuously. From Feb till Apr 2020, international commodity prices were declining and during that period, the CPI level actually declined.
As per the report, this low base effect may temporarily push YoY inflation higher in the next few months. However, the government measures to ensure smooth supply especially through Ramzan Package will ease out inflationary pressures. For next month it is expected to remain between 7.9 and 9.5 percent, the report added.
Going by the report, on agriculture front, the downside risk to cotton production will hamper targeted growth in agriculture sector.
The report noted that YoY growth rate of LSM remained positive since Jul 2020. The growth of industrial activity is in line with the strong cyclical recovery observed in Pakistan’s main trading partners. It is expected that this recovery will continue in the coming months, providing the absence of a new upsurge of COVID-19 that may require restrictions on economic activity.
The report also underscored that some of the data underlying the February Monthly Economic Indicator (MEI) are still provisional and may be revised next month. But based on available data, the MEI shows consistent growth in February. With the downward risk of the third wave, if MEI flattens out in the coming months, economic growth in the current FY is expected to surpass its target.
With regards to external sector, the report underlines that during Jul-Feb FY 2021, exports of goods and services, as compiled in the Balance of Payments reached 19.9 billion USD as compared to 20.3 billion in the same period of last year. Likewise imports of goods and services reached 37.3 billion this year against 35.7 billion last year, which represents an increase of 4.5 percent. However, in Feb 2021, 3.2 percent growth was seen on YoY basis.
Exports are expected to increase following export-oriented Government policies, while imports are also expected to increase further on the back of recovery of the domestic economy, recent increases in international commodity prices and imports of food items to stabilize domestic food markets. Thus, trade balance is expected to slightly deteriorate but expected strong inflows of remittances will able to cover the trade deficit, the report concluded.
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