FeaturedNationalVOLUME 17 ISSUE # 44

Signs of early relief?

Inflation has started decreasing in Pakistan, albeit slightly, which shows the measures taken by the government will bring down prices in a few months. The government also hopes to reduce the power tariff in the coming months, which will provide real relief to the common people. Pakistan’s exports, remittances and tax collection are also rising, which are positive signs for the economy, though serious external and external challenges persist, especially after the devastating floods.

In the past week, inflation decreased by 0.19pc, and the year-on-year increase dropped from 42.70pc to 40.58pc. According to the Pakistan Bureau of Statistics (PBS), prices of 30 essential commodities increased while rates of 10 commodities decreased. The prices of 11 commodities remained stable. It said the annual inflation rate was 33.03pc for the group earning up to Rs17,732 per month and 38.29pc for those making between Rs17,733 and Rs22,888 per month. The annual inflation rate was 37.74pc for those earning between Rs22,889 and Rs29,517 per month, 38.10pc for those making between Rs29,518 and Rs44,175 per month and 41.81pc for those earning more than Rs44,176 per month. The August inflation rate had jumped to a 47-years-high level of 27.3pc due to the government’s decision to increase prices of electricity and fuel.

Pakistan’s current account deficit also saw a massive 45pc month-on-month decrease, clocking in at $1.21 billion in July, in comparison to a deficit of $2.2 billion in June. According to the State Bank of Pakistan (SBP), the current account deficit shrank to $1.2b in July from $2.2b in June, largely reflecting a sharp decline in energy imports and a continued moderation in other imports. “The narrower deficit is the result of wide-ranging measures taken in recent months to moderate growth and contain imports, including tight monetary policy, fiscal consolidation and some temporary administrative measures,” it added.

Pakistan’s goods exports jumped by 11.6pc year-on-year in August, compared to the same month last fiscal year, while imports contracted by 8.26pc to $6.03 billion from $6.577 billion in Aug 2021, provisional data showed. In July, exports dropped by 5.17pc; however, export proceeds bounced back to $2.5 billion in the month under review against $2.24 billion in the same month last year. On a month-on-month basis, export proceeds increased by 11pc. They had posted a negative growth of 14.75pc in August 2020. In July-August, total export proceeds stood at $4.75 billion against $4.58 billion in the corresponding period last year, indicating a growth of 3.71pc.

In another positive development, overseas Pakistanis remitted $2.7 billion in August. The country received $2.724b in August, a growth of almost 8pc on a month-on-month basis. However, the amount was just 1.5pc higher when compared with $2.682b in August 2021. Besides, in July-August, remittances by overseas workers dropped by 3.2pc to $5.247b from $5.418b a year ago. Earlier, experts feared remittances might decline since the cost of living in the Middle East and Europe has gone high, which may dent remittances from these regions, but healthy inflows in August quelled all such speculations.

However, the recent floods pose a serious challenge to the country and its economy despite some positive developments on the economic front. The finance ministry has warned that the economic outlook is surrounded by global and domestic uncertainties, including lower growth, especially in the wake of recent heavy rains and floods affecting Kharif crops as well as elevated inflation. It has also warned that the recessionary tendencies may hurt Pakistan’s export markets in the coming months. “The economic outlook is surrounded by global and domestic uncertainties. Geopolitical tensions remain unabated, worldwide inflation remains high, interest rates show tendencies to rise, and the US dollar strengthens. Pakistan’s external environment is, therefore, facing increasing challenges,” the ministry stated in its monthly update. “Domestically, the government has taken necessary measures to comply with IMF requirements. These have further increased inflation, but also have the positive effect of alleviating the external financing constraints. Recent floods caused by abnormally heavy monsoon rains have adversely affected important and minor crops which may impact the economic outlook through agriculture performance. Inflation has continued to accelerate in recent months, mainly due to supply shocks that have created very significant monthly impulses on the CPI level. If these monthly impulses can be contained to more normal levels in future months, inflation may start to decelerate,” it noted.

According to the ministry, economic growth remains positive. But restrictive demand management and high inflation may cause Pakistan’s cyclical position to deteriorate in the coming months. This cooling off may bode well for the trade balance and by extension for the current account balance, official reserves, and the exchange rate. On the other hand, recessionary tendencies in Pakistan’s main export markets may contain exports. Furthermore, Pakistan’s NEER has significantly depreciated in recent months, and its REER appreciated again in June. The current account balance is expected to improve considerably in the coming months. The new agreement with the IMF ensures that Pakistan’s external financing needs will be met. This opens room for further implementation of supply-side policies that should elevate Pakistan’s potential growth rate to a higher sustainable level. One essential necessary condition for this to happen is a drastic increase in Pakistan’s propensity to invest. Physical and human capital accumulation and productivity enhancement are the essential ingredients to upgrade Pakistan’s sustainable long-run growth path, it observed.

Fitch Solutions has also warned that the severe floods would weigh on agricultural production and exacerbate the country’s external imbalances. It noted that the economy faces significant challenges. According to Bloomberg, Pakistan needs to service $3 billion of debt through June 2023, including a $1.7 billion repayment due in December. Given the extent of flooding and the reduction in crop output, Fitch also expects the number of citizens facing food insecurity to rise further, posing additional downside risks to social stability.

In this situation, all parties should shun their political differences and work together to rehabilitate flood victims. However, it is a short-term agenda. Their real target should be long-term planning to put the country on the path to sustained development and prosperity.