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Resurgence of virus poses downside risks to economic recovery: MoF

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November 29, 2020 (MLN): Economic recovery in Pakistan which was started at the start of the new fiscal year, continued in the month of October 2020. However, the ignorance of the general public caused the resurgence of the COVID 19 infection, forcing the government to follow partial careful policy especially in services sectors and thus putting downside risks to the outlook.

The recent upsurge in COVID-19 infections and hospitalizations have also hit Pakistan’s most important export markets, with the exception of China. In the Euro Area and the UK, fresh lockdown measures have been imposed to flatten the curve. On the other hand, in US, no major restrictions have been imposed yet, thus infection seems still rising. As a result, the recent economic indicators show a mixed global outlook.

The Finance Ministry in its monthly “Economic Update and Outlook” for November 2020, highlighted if the SOPs are strictly followed by the general public, it is expected the negative impact can be dampened and the economy will return to a long-term sustainable growth path.

During Jul – Oct FY 2021, the main drivers of inflation (CPI) in Pakistan are international and domestic commodity prices, especially for food and oil products, the exchange rate and monetary and fiscal policies. Supply disruptions and inflation expectations have also played a major role in the determination of prices of food and non-food items.

In recent months, international food prices have increased compared to last year while the oil price is stable at a lower level. Further, the PKR exchange rate slightly appreciated against the USD when the first 4 months of 2020 are compared with the corresponding months of 2019, thus, easing out inflationary pressures.

There is no change in Indirect tax or other measures that may cause inflationary impact. Likewise, the interest rate is kept unchanged. The CPI level reacts to the aforementioned developments with a time lag, implying that they contain relevant information for short term inflation prediction. On the basis of this information, MoM headline inflation is expected to be around 0.9 percent in November (the margin between -0.3 and +1.4 percent) against 1.7 percent in October 2020 and 1.45 percent in October 2019. It seems that the tendency of inflation easing will prevail in the coming months, the Ministry said.

As per the report, the fiscal sector continues to perform better in the wake of unprecedented challenges due to COVID 19 pandemic. During the first quarter of the current fiscal year, although the fiscal deficit slightly increased to 1.1 percent of GDP against 0.7 percent recorded last year, yet it remained below the target set for the first quarter. On the revenue side, FBR tax collection performed better in the wake of activities during the first four months of the current fiscal year. However, with the increase in COVID infection and related containment measures, slower economic activities in services sectors may slightly impact revenue collection in Q2 FY2021.

On the external front, during October 2020, the Current Account remained in surplus ($382 million) for the fourth consecutive month. Thus, Current Account posted a surplus of $1.2 billion (1.3 percent of GDP) during July-Oct FY2021 against a deficit of $1.4 billion last year (-1.6 percent of GDP). The contraction in the import of goods and services, coupled with healthy growth in workers' remittance resulted in a surplus of the current account.

The report underlined that sufficient orders are available with the exporters for the coming months and it is expected that the export sector will perform better in the future. However, delayed economic recovery in some of Pakistan’s main trading partners may exert a downside risk. On the other hand, the persistent growth performance in Pakistan may lift imports marginally. In November 2020, exports of goods and services are expected to reach around 2.3 billion US$. Imports in the same month may remain around 4.1 billion US$. Regarding remittances inflows, it is expected that these will remain higher than the trade deficit in goods and services.

During 1st July-30th October 2020, Broad Money (M2) observed a cumulative expansion of Rs 76.1 billion (growth of 0.36 percent) compared with Rs 115.4 billion (growth of 0.65 percent) last year. Growth in money supply is completely attributed to Net Foreign Assets (NFA) which remained Rs 314.8 billion as compared to Rs 295.7 billion last year. Net Domestic Assets (NDA) of the banking system declined by 238.6 billion against a reduction of 180.4 billion last year.

The Pakistan economy is underway in recovery. The Monthly Economic Indicator (MEI) shows strong growth in the first four months of the current fiscal year. Furthermore, based on current information, no significant deterioration in the balance of trade in goods and services is expected. Also, the inflow of workers remittances remains strong. Therefore, the recovery may preserve the external balance. External balance implies the prospect for a stable exchange rate in the near term, which may contribute, in addition to specific government measures, to reduce inflationary pressures.

A major risk to this scenario of economic recovery on a path of external and internal balance, is the upsurge of COVID-19 infections, all over the world and also, to a lesser degree, in Pakistan.

On the other hand, very recent world-wide communications regarding the production of several very successful new vaccines may open the scope for opening a back-to-normal path in the near future. These developments may boost business and consumer confidence and further enhance economic growth.

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Posted on: 2020-11-29T19:24:00+05:00