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Photo Source: The News International

Pakistan Reader# 269, 8 January 2022

Monthly report of Finance Ministry paints a gloomy yet prospective outlook



The higher growth trajectory however relies too much on the improving trade balance and easing of exchange rate pressure

Ankit Singh

Ministry of Finance, Pakistan releases a monthly economic update and outlook by the end of every month and the economic update and outlook in the last month of the year 2021 discussed on the economic data for the month of July-October of the financial year of 2022. The report stresses the need for continued policy support to ease inflationary trends and to tackle the uncertainty induced de to the pandemic. The report is divided into international performance and outlook, monthly performance of Pakistan and the outlook projection for Pakistan’s economy.

 

International performance and outlook
The report discusses about the International Monetary Fund’s projection remain suppressed backed by uncertainty of the pandemic and the induced tight labour market and the current broad based inflationary pressures. The manufacturing and homebuilding sectors have peaked in post pandemic months and services sector has held steady growth rates especially financial and business services. The service sector in Pakistan contributes more than 50 per cent to the GDP and hence over business environment in the region and the world will reduce the problems for growth trajectory in Pakistan. There was accelerated growth in Euro area, Japan, India and Australia and growth subsided in the US, China, UK and Brazil. Weekly economic index (WEI) in OECD countries has been on a declining trend overall. 

Monthly performance of economy of Pakistan
During the month of July-December 2021, 11 out of 15 large scale manufacturing sectors have experienced a positive growth led by automobile, steel, pharmacy, cement and consumption of oil in various industries. The exports had a ‘composite leading indicator’ index above 100 but the momentum has further slowed due to short term uncertainty and impacting overall long-term potential trade growth in Pakistan. The total exports for the July-November FY 2022 stood at USD 12.4 billion compared to USD 9.7 billion for the same months in the previous financial year. The imports have almost doubled since last financial year, the imports for the months of July-November FY 2022 were USD 33 billion, while for the previous FY the imports stood at USD 19.5 billion. The high import reflects the strong economic dynamism and diversified needs in Pakistan. Being a net importer of food items makes it more vulnerable to current surge global food prices and hence the month-on-month (MoM) inflation can be partially because of this. Consequently, current account deficit (CAD) stood at USD 7.1 billion (5.3 per cent of GDP) and fiscal deficit stood at 1.1 per cent of the GDP for the months of FY July-November 2022.

The FBR (Federal Bureau of Revenue) as well has recorded an increase in total tax collection, the larger share contributed by higher sales tax (non-direct tax) apart from direct tax collection. When SBP raised monetary policy rate by 100 basis points to counter inflation on 14 December, the objective was to reverse the trend of money supply in the market and increase the net foreign assets (credits) in the economy. While net domestic assets have occupied the space by decreased net foreign assets held largely by Manufacturing (of which textile), electricity, gas, steam and air conditioning supply and information and technology. 

The foreign reserve stood at USD 24.6 billion, a slight notch higher from the previous year forex reserve of approx. USD 20 billion. The umbrella schemes under Ehsaas program received USD 603 million from the government to incur welfare policies and expenditures. 

The Outlook for the upcoming year
Though the financial year (FY) 2022 has already begun, the outlook becomes interesting seeing the collusion with cultural new year. The projection in agriculture is satisfactory especially cotton and wheat. The manufacturing as well is poised to grow steadily, however as per the report, the large-scale manufacturing (LSM) is Pakistan is more related to industrial sector and less causally related to GDP making it more vulnerable to disruptions like the pandemic. It is however true that LSM gives a nice thrust to overall services sectors performance and LSM is expected to remain in moderate growth zone.

The inflation is expected to cool down as summer closes in while government will do its part in easing the exchange rate pressure and improving economic agent expectations. The international commodity prices are also expected to cool down after reaching a newer plateau of price level. The report is optimistic about higher foreign remittances, an improved trade balance and inflationary measures which is expected to lower over CAD and increasing fiscal and monetary health. 

References
Monthly Economic Update & Outlook December 2021,” Government of Pakistan, Finance Division, Economic Advisors Wing, 27 December 2021
Ayaz Ahmed, Henna Ahsan, “Contribution of Services Sector in the Economy of Pakistan,” PIDE Islamabad, July 2011

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