- Finance ministry notes economic growth in Pakistan is facing challenging situation.
- It says inflationary pressure may ease once international commodity prices decline, stabilise.
- The economy will tend back to potential output in the long run.
ISLAMABAD: The Ministry of Finance in its latest report released here on Wednesday said that the country’s growth prospects were expected to remain “satisfactory”, but the number of potential risks might diverge it from the optimal path.
According to Monthly Economic Update and Outlook for June 2022, the economic growth in Pakistan was facing a challenging situation due to wider macroeconomic imbalances.
“The current account deficit which remained high during the first three quarters of the current fiscal year may decelerate by end of this fiscal year and onwards,” the report said, adding the delayed pass-through of international oil prices into domestic energy products may increase inflation.
Inflationary pressure may ease once international commodity prices decline and stabilise, it added.
According to the report, the cyclical position of Pakistan’s main trading partners was somewhat deteriorating. Their central banks are raising interest rates to counter inflation thus leading to a possible recession in those countries.
Second, per the report, SBP may further raise domestic interest rates, adding the demand management policy of SBP may not be very effective as the current waves of inflation are largely caused by supply constraints and increasing international prices, especially commodity prices.
The exchange rate depreciation was also a source of concern as it makes the imported raw material more expensive, it said.
Third, the persistent rise in domestic consumer prices is eroding real incomes, limiting the spending power of consumers and investors.
The report said these risk factors may challenge the macroeconomic environment and growth prospects, especially by negatively affecting the temporary cyclical output gap.
The economy would tend back to potential output in the long run and sound policy responses may lay the basis for a sustainable long-run growth trajectory.
“This should be accompanied by measures that aim to strengthen the growth of Pakistan’s potential output. These measures need to include the creation of a beneficial investment climate, confidence promotion and stimulus for promising economic initiatives with high growth potential,” it added.
According to the report, the current account balance may profit from sound demand management policies. In the longer run, elevating the growth rate of potential output reinforces the supply side of the economy, accompanied by neutral demand management will bring the current account balance onto a long-run sustainable path.
The report further said that despite achieving a real GDP growth of 5.97% in FY22, the underlying macroeconomic imbalances and mounting international risks are depicting a challenging outlook, especially pertaining to the external sector.
International commodity prices, especially oil and food prices are the main external drivers of inflation whereas domestic supply chain and market expectations also played an important role to determine inflation.
It is mentionable that YoY inflation has been rising since September 2021. This acceleration is expected to continue in June 2022
The input situation for Kharif 2022 is satisfactory and it is expected that the agriculture sector will continue to augur well on account of continued government support.
In the industrial sector, as expected, Large Scale Manufacturing (LSM) output contracted in April as compared to March. In fact, LSM activity remained strong both in terms of underlying trend growth and in its cyclical position.
Nevertheless, LSM may contract in May as compared to April mainly due to strong negative seasonal effects. But on a year-on-year basis, LSM is expected to show continued solid growth.
In May 2022, the MEI continues to issue a strong economic signal mainly due to the continuing robust performance of LSM, which is known to exert significant multiplier effects on other sectors of the economy.
Meanwhile, the tax collection by the Federal Board of Revenue (FBR) has maintained its growth momentum by posting a 28.4% increase from July to May FY2022.