The Ministry of Finance has warned of an above 21% rate of inflation, difficult economic conditions, and growing fiscal issues as a result of expenditure overruns during the current fiscal year, which has resulted in a generally poor macroeconomic performance so far this year (FY23).
In its “Monthly Economic Update & Outlook” report published on Sunday, the ministry stated that “Pakistan’s economic climate is tough due to damages caused by floods.”
It predicted that Consumer Price Index (CPI) inflation would stay within the range of 21-22.5pc and noted that the stringent monetary policy stance of the State Bank and higher-than-anticipated inflation were both having an impact on growth.
The Economic Adviser’s Wing (EAW) of the finance ministry produced the report, which estimated that the fiscal deficit for the first two months (July-August) of the current fiscal year was 0.9 percent of GDP, or Rs672 billion, compared to 0.7 percent of GDP, or Rs462 billion last year. The report also predicted that the massive need for relief and rehabilitation following the devastating flood would pose significant obstacles to efforts to achieve fiscal consolidation.
“Since government needs to allocate higher resources for the rescue and rehabilitation of flood victims and the rebuilding of infrastructure, there will be a significant pressure on overall expenditures,” the report said, adding that an expected slowdown in economic activity and growth due to the devastation triggered by the floods may impact domestic resource mobilisation efforts.
The EAW noted that the agriculture sector had been particularly hard hit by the destruction brought on by the floods, and due to forward linkages, this impact will also be transferred to other sectors of the economy, thus changing the overall economic outlook.
Economic activity already “looks to have dropped to a lower growth path since the start of the fiscal year,” according to the report. Furthermore, the performance of Pakistan’s primary trading partners is being severely harmed by the slowdown in global economic development and increasing commodity prices.
Despite being favourable in August, a slowdown in the large-scale manufacturing (LSM) sector and increasing production costs were the other significant variables with detrimental effects on future growth. Additionally, a slowdown in domestic activity can be indicated by moderate import growth.
In terms of agriculture, the report stated that rice output reduced by 40.6 percent to 5.5 million tonnes from 9.3 million tonnes last year, while sugarcane production fell by 7.9 percent to 81.6 million tonnes this year from 88.7 million tonnes last year. Production of cotton fell by 24.6 percent to 6.3 million bales and of maize by 3 percent to 9.2 million tonnes.
Tractor production and sales fell by 36.2 percent (7,991 units) and 30.3 percent (8,379), respectively, in the July–September FY23 period, while the amount of agricultural credit disbursed climbed by 31.5 percent to Rs384 billion. Urea and DAP offtake during the Kharif season 2022 (April-September) was 3,137,000 tonnes, which is 3.7 percent less than Kharif 2021, and 491,000 tonnes, which is 44.8 percent fewer than Kharif 2021.
Amid global headwinds and floods, the industrial sector’s performance also remained weak. The LSM was suppressed by 0.4 percentage points during July and August of FY23 compared to growth of 11.3 percentage points during the same period in FY22 as a result of stabilisation measures such as monetary and fiscal tightening and import compression methods to fix imbalances. While the output of 14 other sectors decreased, eight out of the 22 sectors experienced positive increase.
CPI inflation was 25.1 percent between July and September of FY23 compared to 8.6 percent during the same time last year. Due to widespread floods that ruined crops and farmland, food inflation increased. Compared to the deficit of Rs37 billion during the same period last year, the main fiscal balance showed a deficit of Rs90 billion in July and August of FY23.
Direct taxes had a healthy growth of 41.8 percent of the total tax revenue collected, followed by federal excise at 11.6 percent, customs at 5.1 percent, and sales tax at 2.7 percent. Compared to the same period previous year, loans to private sector enterprises increased by Rs 99.7 billion ($177.4 billion).
Compared to the same period last year, the current account deficit for July through September of FY23 was $2.2 billion, mostly because exports increased by 2.6 percent and imports decreased by 12.4 percent. Compared to July through September of FY223, imports totaled $16.4 billion instead of $18.7 billion.
The amount of foreign direct investment for the first quarter of the current fiscal year decreased dramatically by 47 percent, from $479.2 million to $253.4 million. Between July and September of FY23, foreign private portfolio investment saw a net outflow of $12.1 million. Investments in foreign public portfolios saw a net outflow of $18.2 million.
Between July and September of FY2023, the total foreign portfolio investment had a $30.3 million outflow compared to a $961.6 million inflow the previous year. Total foreign investment from July to September of FY23 was $223.1 million as opposed to $1.358 billion the previous year, a 600% decrease. Workers’ remittances were $7.7 billion in July-September FY23 as opposed to $8.2 billion in the prior year.
