ISLAMABAD: 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.
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 adversely affected important and minor crops which may impact the economic outlook through agriculture performance.
The Finance Division has mentioned these developments in its monthly economic outlook for August 2022, released on Thursday.
YoY and MoM inflation have been accelerating drastically in June and July. The main drivers were seen to be the pass-through of high international commodity prices and exchange rate depreciation into domestic retail prices. On the other hand, during the last 12 months, money supply growth was compatible with a low and stable inflation rate. But the recent supply shocks have brought the CPI to a level much higher than one year ago.
Taking into account, the expectation that domestic retail prices may further increase in August 2022 compared to July 2022, even if there would not be any further MoM increase in August 2022, YoY inflation will settle at nearly the same level as the one observed in July 2022.
Recent floods driven by exceptionally heavy monsoon rains have reduced the potential output of both main and minor Kharif crops, thereby tempering the positive outlook of the agricultural sector.
Industrial activity, measured by the LSM index is the sector that is most exposed to the developments in international markets as illustrated in Fig-7. It compares the cyclical component of LSM with the weighted average Composite Leading Indicators (CLI) in Pakistan’s main export markets.
The CLI of some individual countries is constructed by the OECD to reflect the deviation of current GDP from its potential level. The cyclical component of Pakistan’s LSM output is obtained by extracting the stochastic trend from the seasonally adjusted LSM series. LSM index is published with a time lag of two months, whereas CLI is published with a one-month lag.