ISLAMABAD – The Finance Ministry has identified five major challenges facing Pakistan’s economy, including rising inflation and external deficit, currency depreciation, declining foreign exchange reserves and growing uncertainty.
“Pakistan is currently facing several significant challenges: accelerating inflation, high external deficits, exchange rate depreciation, declining foreign exchange reserves and growing uncertainty,” the ministry noted in its “Monthly Economic Update & Outlook May 2022”. He said economic growth remained relatively high at 5.97%, but in the presence of macroeconomic imbalances, it may not be sustainable.
The ministry has forecast a higher inflation rate, which is expected to remain between 12.5 and 13.8 percent for the current month (May). Inflation in Pakistan is fueled by external and internal factors. International commodity prices, especially oil and food prices, are the main external sources of inflation. In recent months, international commodity prices have accelerated. Since January 2022, the monthly increase in international oil prices has averaged nearly 10% per month. The international food price index recorded a monthly average increase for the month of almost 6% per month. International commodity prices have been on an upward trend following the conflict between Russia and Ukraine. But in the current circumstances, the USD has strengthened against many currencies, including the Pakistani Rupee. These external impulses of cost inflation not only raise domestic prices, but also have longer-term second-round effects. It is commonly accepted that these second-round effects are combated by restrictive fiscal and monetary policies. Since January 2022, the average monthly inflation increase in Pakistan was 1% per month.
Looking ahead, the import content of domestic growth is expected to decline somewhat, supported by unnecessary import restrictions. Moreover, a slowdown in potential economic growth over the next few months could contain the import bill. On the revenue side, assuming a constant REER, the content of exports could stabilize around current levels. These projections imply an improvement in the trade balance of goods and services. Although remittances increased in April due to the Eid factor, they may return to a normal trend in the coming months. Taking into account all other secondary and primary income payments and receipts, the current account deficit is expected to remain well below the $1.0 billion mark in the coming months.
According to the ministry, the expenditure side is expected to come under further pressure in the remaining months of the current fiscal year. On the revenue side, tax collection is currently showing a remarkable performance, posting a growth of 29% during the first ten months of the current financial year. Data for the first ten months shows that revenue collection exceeded the target of Rs 237 billion. This is despite tax relief measures which have impacted revenue collection by around Rs 73 billion in the month of April 2022 alone.
In the longer term, Pakistan’s main problems can be solved by designing a credible and sustainable future economic trajectory that inspires consumer and investor confidence. Economic decisions are based on expectations about future economic trajectory as well as the degree of certainty/confidence about development prospects. Supply-side policies are an important part of this process. Pakistan’s propensity to invest is much lower than that of emerging markets and high-growth developing countries. Accelerating the share of gross fixed capital formation in GDP would create additional productive capacity to meet growing consumer and producer demand. Such a supply-side framework, designed to reallocate the use of national income from consumption to investment spending, can be accompanied by appropriate demand management policies.