International inflation, floods minimize economic outlook for FY 2023

F.P. Report

ISLAMABAD: In the backdrop of international price hike and recent exceptional floods, the economic outlook for Pakistan in the current fiscal year (2022-23) is likely to remain below the target, says ‘Economic Update and Outlook for September 2022’ released by finance ministry here on Friday.

“The economic outlook for Pakistan in the current fiscal year has become uncertain and will likely remain below the target,” says the report adding the macroeconomic imbalances may ease with the expected slowdown in the economic growth.

It says, in March 2022, international oil and food prices broke out the upper bound of the margins observed in the last two decades, which impacted significantly inflation in Pakistan.

“Even if international commodity prices would mean-revert in the near future, domestic inflation may still suffer from delayed adjustments and second round effects. Also, the depreciation of the rupee continues to exert upward pressure on domestic prices,” it says.

At the same time, recent exceptional floods have destroyed human, physical, and livestock capital and deprived many families of their assets and incomes. Besides the cost in terms of lost lives and capital, these events will certainly affect the creation of gross value added and hence economic growth.

The growth was already under pressure due to unstable economic conditions in the rest of the world and due to the necessary fiscal consolidation, high rates of interest, and inflation.

According to the report, the fiscal deficit is budgeted to reduce to 4.9 percent of GDP, while the primary balance is a surplus of Rs 153 billion.

The budget for FY2023 was prepared to achieve the goals of stabilizing economic growth, increasing revenues, rationalizing expenditures through prudent expenditure management, enhancing exports, and protecting the vulnerable segments of society through relief measures and pro-poor initiatives.

However, the economy of Pakistan has been affected severely by widespread destruction brought by extreme flooding. Consequently, there will be a detrimental impact on the government’s fiscal situation from both the revenue and expenditure sides.

The trade deficit in goods and services declined marginally in July as both exports and imports gained strength, it says adding the exports are expected to stabilize. According to Pakistan Bureau of Statistics (PBS), during July-August FY2023, exports increased by 3.3 percent to $ 4.7 billion ($ 4.6 billion last year).

Remittances are expected to stabilize at around current levels. This together with the expected path of the trade balance and other primary and secondary income transactions would guide the current account balance.
According to the report, the agricultural outlook was still not clear as the output of both important and other Kharif crops has suffered significantly due to recent floods and unprecedented heavy monsoon rains. The stay of water in the cropping area may also affect the sowing of Rabi crops.

Meanwhile, the Inflation has started reverting as the MoM price increases have been on a declining path during the last two months. Though the YoY inflation has shown significant acceleration from June till August. CPI inflation is recorded at 26.1 percent during Jul-Aug FY2023 as against 8.4 percent in the same period last year. CPI inflation for August FY2023 is recorded at 27.3 percent as compared to 8.4 percent in the same month last year.

Therefore, Pakistan’s external environment faces rising challenges keeping in view the geopolitical conflicts as well as global and domestic uncertainties.
In Jul-Aug FY2023, workers’ remittances were recorded at $ 5.2 billion ($ 5.4 billion last year), decreased by 3.2 percent, however continued to remain above the $2 billion mark since June 2020.

The Large-Scale Manufacturing was affected by monetary tightening, and uncertainty in the financial market while flood has further aggravated the supply chain disruptions and dragged down it to negative growth of 1.4 percent in July FY2023 against 4.4 percent growth in the corresponding period last year.
The revenue collection during Jul-Aug FY2023 grew by 9.7 percent to Rs 948.1 billion against Rs 864.5 billion in the comparable period of last year.

The Foreign Direct Investment (FDI) reached $ 169.5 million during Jul-Aug FY2023 ($ 229.5 million last year) decreased by 26.1 percent. On MOM basis, FDI was recorded at $ 110.7 million in August 2022 as against an inflow of $ 58.9 million in July 2022.
Meanwhile, according to the report, Pakistan’s total liquid foreign exchange reserves stood at $13.8 billion on Sep 21, 2022, with the SBP’s reserves recorded at $8.1 billion, while commercial banks’ reserves remained at $5.7 billion. (APP)