FeaturedNationalVOLUME 17 ISSUE # 50

Political instability threatens economic outlook

Pakistan’s trade balance is expected to improve and inflation is projected to come down in the next few months. However, recent floods and growing political instability may hurt the country’s economic outlook.

It is a pity that Pakistan starts facing problems when it appears that it has taken necessary steps to put the economy on the path to sustained growth. The present government has withdrawn all subsidies which were hurting the economy but new threats have appeared in the shape of the floods and political instability caused by the long march of former Prime Minister Imran Khan.

Inflated power bills and high inflation are badly hurting the common people and there are no prospects of the electricity tariff, fuel and food prices coming down shortly. On the external front, the biggest issue is fast depleting foreign reserves. The reserves held by the State Bank of Pakistan (SBP) decreased by $157 million on a weekly basis, clocking in $7.44 billion as of October 21, 2022, according to data released by the government. Net foreign reserves held by commercial banks amounted to $5.72 billion, taking the country’s total reserves’ position to $13.16 billion. “During the week ended on October 21, the SBP’s reserves decreased by $157 million to $7,439.9 million due to external debt repayment,” the SBP said in a statement.

Sensitive price index-based weekly inflation rose over 4pc during the last week, which was attributed to a significant increase in the power tariff. The Pakistan Bureau of Statistics (PBS) reported that the SPI-based inflation rate rose by 4.13pc during the week ended October 27 compared to the previous week. It rose 30.68pc compared to the same period of last year. Data released by the PBS showed that the average prices of 21 essential items, electricity charges, salt, rice, and other items had increased during the week. Prices of 16 items, including tomatoes, onions, pulse Masoor, and chicken declined, the rates for 14 essential goods remained unchanged. The SPI for the lowest income group increased by 4.64pc compared to the previous week.

According to the Economic Update and Outlook October released by the Ministry of Finance the trade balance of Pakistan is expected to improve in the coming months on account of import contraction due to a deceleration in domestic economic activity and aggregate demand. “Overall economic outlook shows an optimistic picture of the economic performance in the coming months. The CPI inflation is declining, the rupee has gained stability, and the current account balance is on an improving trend. These developments indicate that economic activity will remain positive and persistent in coming months,” the report added.

It said that for the future path of inflation, the exchange rate is of utmost importance. Moderating inflation also contributes to exchange rate stability, which in the benign case may generate a virtuous inflation-exchange rate cycle. Further, exchange rate stability requires sound economic fundamentals. Besides inflation, a manageable current account deficit and guaranteed financing of this deficit by healthy financial inflows are also required. When markets get convinced about these prospects, speculative bubbles in the exchange market would be highly unlikely, it noted.

In the short to medium run, helped by sound domestic fiscal and monetary policies, the current account deficit is expected to reduce. A major risk factor, though, relates to the necessary imports to absorb the devastating consequences of the floods. However, downward revision of Pakistan’s main trading partners’ outlook may have a downside risk for exports in coming months. For the fiscal sector, catastrophic floods require rehabilitation and massive expenditures, which will pose a significant challenge for fiscal consolidation. On the other hand, growth prospects have weakened, along with contained economic activities and low demand, which will impact resource mobilization. Thus, FY2023 is moving with challenges, seeking a balanced policy mix for stabilization. In the long run, with sound fundamentals and a healthy growing economy, a significant raise is required in gross fixed capital formation instead of consumption. This will increase the national income significantly. Further, there is a need to enhance the productive capacity and productivity in each sector to substitute imports by domestic production and provide more supply capacity to the foreign markets, the report added.

It is encouraging that the provisional net tax collection in September stood at Rs 684.8 billion against Rs 534.0 billion in the same month of last year, posting a growth of 28.2pc. Thus, the first quarter of the current fiscal year ended up with a growth of 17pc with a net tax collection of Rs 1633.9 billion against Rs 1396.4 billion in the comparable period of last year. Similarly, the target for the first quarter has also been surpassed by Rs. 24.4 billion.

The fiscal deficit during July-August FY2023 was recorded at 0.9pc of GDP (Rs.672 billion) against the deficit of 0.7pc of GDP (Rs.462 billion) in the same period of last year. The primary balance posted a deficit of Rs90 billion (-0.1% of GDP) in July-August FY2023 against a deficit of Rs37billion (-0.1% of GDP) in the comparable period of last year. The current account posted a deficit of $2.2billion for July-September as against a deficit of $3.5 billion last year, mainly due to increase in exports and contraction in imports.

It is worrying that the production of all major crops has decreased. The sugarcane produce decreased by 7.9pc to 81.6 million tonnes from 88.7 million tonnes last year. Rice production declined by 40.6pc to 5.5 million tonnes over last year’s 9.3 million tonnes. Maize production decreased by 3pc to 9.2 million tonnes compared to 9.5 million tonnes last year. The cotton yield declined by 24.6pc to 6.3 million bales from 8.3 million bales last year. The wheat production target for the upcoming Rabi 2022-23 is fixed at 28.370 million tonnes from an area of 9.3 million acres.

Pakistan is facing many challenges on the external front but the internal situation is not easy either. People are suffering from the worst inflation in the country’s history. Power bills have become difficult to pay. Some people had to pay the bills by selling their valuables and motorcycles. The government will have to take urgent steps to provide low-cost electricity to people and reduce prices of food and essentials.

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