By Staff Reporter
ISLAMABAD: Ministry of Finance said on Wednesday persistently high inflation will haunt economic growth next year, while the interest rates would rise faster than assumed so far.
“Economic growth in Pakistan is facing a challenging situation due to wider macroeconomic imbalances,” the ministry said in its monthly report.
The current account deficit which remined high during the first 3 quarters of CFY, may decelerate by end of this fiscal year and onwards. The delayed pass-through of international oil prices into domestic energy products may increase inflation.”
Pakistan’s growth prospects are expected to remain satisfactory, but the number of potential risks may diverge it from optimal path.
First, the cyclical position of Pakistan’s main trading partners is somewhat deteriorating. Their central banks are raising interest rates to counter inflation thus leading to possible recession in those countries.
Second, SBP may further raise domestic interest rates. The demand management policy of SBP may not be very effective as the current waves of inflation are largely caused by supply constraints and increasing international prices, especially commodity prices. Exchange rate depreciation is also a source of concern as it makes the imported raw material more expensive.
Third, the persistent rise in domestic consumer prices is eroding real incomes, limiting the spending power of consumers and investors.
These risk factors may challenge the macroeconomic environment and growth prospects, especially by negatively affecting the temporary cyclical output gap. The economy would tend back to potential output in the long runs. Sound policy responses may lay the basis for a sustainable long run growth trajectory. This should be accompanied by measures that aim to strengthen the growth of Pakistan’s potential output.
These measures need to include the creation of a beneficial investment climate, confidence promotion and stimulus for promising economic initiatives with high growth potential. The current account balance may profit from sound demand management policies. In the longer run, elevating the growth rate of potential output reinforces the supply side of the economy, accompanied by neutral demand management will bring the CAD on a long run sustainable path.
Despite achieving a real GDP growth of 5.97 percent in FY2022, the underlying macroeconomic imbalances and mounting international risks are depicting challenging outlook especially pertaining to external sector.
Inflation in Pakistan is driven by both external and internal factors. International commodity prices, especially oil and food prices are the main external drivers. Furthermore, domestic supply chain and market expectations also play an important role to determine inflation. It is mentionable that YoY inflation has been rising since September 2021. This acceleration is expected to continue in June 2022.
The government has withdrawn subsidies on fuel and energy products to control the mounting twin deficit. As a result, sharp increase in prices of all oil products is witnessed. Further, the recent rise in international commodity prices especially energy and food, will also be translated into domestic prices. The government will continue to alleviate the burden of the poorest segment of the society through various programs. In this scenario, YoY inflation is expected to accelerate in June and may remain within range of 14.5 -15.5 percent.
Measures to offset the impact of higher international commodity and oil prices due to the Russia-Ukraine conflict took a significant toll on revenue and expenditures. Consequently, the risk of fiscal slippages during the current fiscal year has increased. On the revenue side, FBR tax collection has maintained its growth momentum by posting a 28.4 percent increase during Jul-May FY2022.
However, growth momentum has been realized largely on the back of import-related taxes due to a sharp rise in import volumes. The government has announced measures to restrict imports in an effort to relieve external account pressures. With these measures in place, meeting the FBR tax collection target for FY2022 will be a daunting task. In the wake of these challenges, FBR is striving hard to improve domestic tax collection through various policy and operational level efforts. It is worth mentioning that FBR has launched a new culture of clean taxation with a focus on collecting only the fair tax and not holding up refunds that are due to be paid.
This has ensured the much-needed cash liquidity for the business community. All these measures would be supportive in achieving a healthy and steady growth in revenue collection, going forward.
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