FeaturedNationalVOLUME 17 ISSUE # 16

Inflation relief: Improved economy or opposition’s threats?

Record exports and tax revenue have enabled the government to slash petrol and diesel prices by Rs10 a litre and the power tariff by Rs5 a unit. The step was unexpected at a time when fuel prices had reached exceptionally high in the world in the aftermath of the Russia-Ukraine conflict. The country is projected to face Rs250-300 billion losses till the next budget in June. However, it will provide much-needed relief to people from rising prices and restore Prime Minister Imran Khan’s popularity.

According to Prime Minister Imran Khan and his ministers, the package was announced after the national economy is improving fast and it can afford the provision of such incentives. The government had to slash the Public Sector Development Programme (PSDP) by Rs50 billion besides a Rs200 billion cut from the budgeted Rs900 billion already agreed with the International Monetary Fund (IMF) for the package. However, the opposition parties claim the prices were reduced under pressure from their protest movement and a no-confidence move.

It is a fact that the national economy is growing faster than expectations. Pakistan’s exports increased by 26pc during the first eight months of the current fiscal year, compared with the same period of the last fiscal year. The country’s exports during July-February were recorded at $20.552 billion as compared to $16.324 billion during the corresponding period of the last fiscal year. Moreover, in February, exports grew by 36pc to $2.808 billion as compared to $2.068 billion in February 2021. Economic experts in Pakistan believe that the increase in exports is linked to the prudent policies and multiple incentives given by the government to support export-oriented industries.

The Federal Board of Revenue (FBR) also exceeded its eight-month tax collection target by Rs268 billion. Against the original tax target of nearly Rs3.53 trillion, the FBR provisionally collected nearly Rs3.8 trillion during the July-February period of the current fiscal year. According to the FBR, the collection was Rs884 billion, or slightly over 30pc higher than the collection of Rs2.9 trillion in the same period of the previous year.

The workers’ remittances remained above the $2b mark for the 20th consecutive month in January. However, they fell by 5pc year-on-year to $2.144 billion in January, the State Bank of Pakistan (SBP) data shows. On month-on-month, the remittances depicted a fall of $376 million or 15pc. The remittances grew at 9.1pc to $17.951b in July-January 2021-22 over the same period last year when the growth was recorded at 24pc over the preceding period. The government eyes over $30b inflows from the overseas Pakistanis in the current fiscal year. The foreign exchange reserves of the SBP also increased after it received $1b from the IMF and $1b proceeds of Sukuk issuance in the international market.

Pakistan’s consumer price index in February also slowed down to 12.2pc, which is the lowest rate in the past three months. It was despite a double digit increase in the prices of essential items, fuel and electricity prices and rising imported inflation. According to the Pakistan Bureau of Statistics, prices of tomatoes increased 191.72pc, chicken 11.61pc and vegetables increased by 10.69pc affecting every household across the country. The main reason behind the increase in prices was a jump in international commodity prices and the devaluation of the rupee. The international oil prices touched $100 per barrel which contributed to a sharp increase in global inflation. The surge in oil prices has hit the consumers globally either directly or indirectly. Prices of all imported commodities such as wheat, sugar, cooking oil, crude oil and raw materials have gone up after the increase in international market prices and devaluation of the currency.

The finance ministry has also warned that an escalated conflict between Russia and Ukraine could keep inflationary and balance of payment pressures in the economy for longer as the crisis would likely further increase energy costs and commodities prices. The main risk for Pakistan’s economy is that these developments may further delay the downward correction in inflation and improvement in the current account balance, the ministry said in its monthly economic outlook report. The report says these tensions may further lift international oil and food prices, as well as other commodity prices outside and beyond their current cycles. Although economic recovery is underway, the economy is also confronted with inflation and external sector pressure. The government is taking various policy, administrative, and relief measures to counter the downside risks to the economy. The average year-on-year inflation in the last two months has declined significantly. But in January 2022, international oil prices accelerated again due to geopolitical tensions. Also, international food prices are on the rise. The monthly economic indicators (MEI) remained strong in December. This is because of favorable movements in macroeconomic high frequency indicators, especially growth in large-scale manufacturing, the ministry noted.

In its latest report, Fitch Ratings said Pakistan’s rating reflected external vulnerabilities, a narrow fiscal revenue base and low governance indicator scores, with GDP growth and most public finance metrics largely in line with peers following a rebasing of GDP. Recent reforms include measures to improve public finances and amendments to the State Bank of Pakistan (SBP) Act, could further entrench the policy shift in recent years towards greater central bank independence and a market determined exchange rate, bolstering Pakistan’s resilience to external shocks. However, a challenging external backdrop of high oil prices and global monetary-policy tightening poses risks; while political pressure could blunt reform momentum, particularly with the conclusion of the IMF programme in September 2022 and elections due by mid-2023, it added.

The American credit rating agency said the risks from a widening current account deficit were likely to remain manageable in light of policy tightening, though sustained high oil prices pose a clear downside risk. “We forecast the deficit to widen to around 4pc of GDP in the fiscal year ending June 2022, from 0.6pc in FY21. Import pressure should ease from 2HFY22, reducing the deficit to 3pc in FY23 in our forecasts. We expect remittances to remain elevated at current levels over the next couple of years. Strong export performance should also continue, but this comes from a low base. We forecast foreign exchange reserves, including gold, to remain stable at around $23 billion (3.2 months of current external payments) over the next couple of years, as debt repayments have offset inflows. This is about $11 billion above 2019 reserve levels. The commitment to a market-determined exchange rate limits downside risks to reserve,” it observed. It also forecast the general government fiscal deficit would fall further to 5.6pc in FY22 and 4.7pc in FY23, from 6.1pc in FY21, on the back of revenue reforms passed in the recent supplementary budget and planned for the FY23 budget.

It is clear the improving economy and revenue helped the government slash rates of petrol and diesel and the power tariff. However, the timing of the step showed it was also feeling the heat of the opposition’s protest movement and no-trust move. In any case, it has provided much-needed relief to people.