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Economic recovery confronts pressure on inflation: Economic Outlook

YoY inflation has accelerated in the last two months, but this may be moderated by the seasonal profile, which was notably positive in October but generally neutralizes in November. The government’s efforts to monitor the functioning of the retail markets especially in essential food products is ongoing and is being strengthened to counter the inflationary pressures.

ISLAMABAD: Economic recovery in Pakistan is underway, but it is confronting pressure on inflation because of multiple reasons. External pressures have begun to materialize mostly due to the compound impacts of increased economic activity, an expansionary macroeconomic policy mix, and rising international commodity prices.

However, the government is taking all necessary measures to dampen inflationary shock. Further financial and economic support from friendly countries will ease out pressure on the external sector.

YoY inflation has accelerated in the last two months, but this may be moderated by the seasonal profile, which was notably positive in October but generally neutralizes in November. The government’s efforts to monitor the functioning of the retail markets especially in essential food products is ongoing and is being strengthened to counter the inflationary pressures.

The MEI is expected to remain strong on the back of observed favorable movements in macroeconomic high frequency indicators especially growth in LSM with strong multiplier effects in services sectors. Ministry of Finance has mentioned these developments in the Monthly Economic Update for November 2021, released today (Nov 30).

Exports of goods and services recorded approximately 3 billion USD in October. It is expected that in the coming months exports will keep rising, helped by the momentum in domestic economic dynamism, and specific government policies to stimulate exports.

The government’s efforts to maintain fiscal discipline through an effective revenue mobilization strategy and better expenditure management will reduce budget deficit during the current fiscal year.

Pakistan is on a high growth path along with inflationary pressure due to exceptional surge in international commodity prices. This is putting stress on the external account, but government initiatives and reversal of the SBP policy will ease out the pressure. Recently, IMF has acknowledged the government’s efforts to deal with COVID-19 by effectively minimizing human and macroeconomic repercussions, resulting in a strong economic recovery.

The unprecedented and severely disruptive global labor market shock triggered by the outbreak of COVID-19 pandemic has still not dampened. According to the ILO, around 220 million people are expected to remain unemployed globally in 2021, while the global unemployment rate may reach 5.7 percent in 2022. Likewise, Global commodity prices are on an upward trajectory mainly due to the rise in freight charges making international trade more costly. Global energy prices continued to soar by 16.1 percent in October. Non- energy prices also increased by 3.4 percent. The prices pertaining to all key sub-groups increased with agriculture commodities up by 1.8 percent, fertilizers 23.4 percent, metals & minerals 3.9 percent and precious metals increased by 0.3 percent.

Real Sector

The revised estimates of cotton production released by Cotton Crop Assessment Committee (CCAC) for the current season shows 9.4 million bales against last year production of 7.1 million bales showing an increase of 32.8 percent. The inputs situation remained favorable as farm tractors production and sales increased by 14.0 percent in Jul-Oct FY2022. Agriculture credit disbursement increased by 6.5 percent to Rs 381.3 billion compared to Rs 358.0 billion during same period last year. LSM posted a growth of 5.15 percent in the first quarter of FY2022 against the growth of 4.53 percent same period last year.

Fiscal, Monetary & External

The fiscal deficit in Jul-Sep FY2022 was recorded at 0.8 percent of GDP (Rs 438.5 billion). The primary balance remained in surplus and stood at Rs 184.2 billion (0.3% of GDP). Expenditures under PSDP grew by 63.2 percent to Rs 262.1 billion in Jul-Sep FY2022 against Rs 160.5 billion in the same period of last year. During the period 1st July-22nd October FY2022, Broad Money (M2) decreased by Rs 409.1 billion compared to the contraction of Rs 104.5 billion in the comparable period of last year. During Jul-Oct FY2022, the current account deficit was recorded at $ 5.1 billion against the surplus of $ 1.3 billion in the same period last year.

Javed Mahmood
Written By

I am an experienced writer, analyst, and author. My exposure in English journalism spans more than 28 years. In the past, I have been working with daily The Muslim (Lahore Bureau), daily Business Recorder (Lahore/Islamabad Bureaus), Daily Times, Islamabad, daily The Nation (Lahore and Karachi). With daily The Nation, I have served as Resident Editor, Karachi. Since 2009, I have been working as a Freelance Writer/Editor for American organizations.

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