Pakistan’s growth potential can take toll on external accounts

KARACHI: The Ministry of Finance has said that the transition towards higher growth may put pressure on the external accounts.

“In the transition towards a higher potential growth level, pressure can be built on the external accounts,” the Finance Ministry said in the monthly economic outlook released on Wednesday evening.

It is important to closely monitor it to ensure that the new growth strategy is sustainable without any macroeconomic imbalances as observed in the past, it added.

The current account balance recorded a deficit of $1.64 billion in June 2021 on the back of higher import bill, it said, adding that the objective of recent accommodative monetary and fiscal policies is to put Pakistan’s economy on a higher growth trajectory.

The economic recovery in Pakistan’s main exporting partners is making the external environment favourable. “However, recent deadly floods in Germany, China, India, and North America may raise direct and indirect economic losses along the global supply and trade chains.”

The ministry said despite significant challenges, the current fiscal performance was largely in line with the government’s strategy to ensure fiscal discipline, increasing revenues and controlling expenditures.

The government is highly committed to strike a balance between the fiscal deficit and economic stimulus package due to the Covid-19 pandemic without hurting the economic growth, it added.

It is evident by the fact that the fiscal deficit contained at 4.6 per cent of GDP during July-May FY2021, while the primary balance remained in surplus throughout this time.

The continuous efforts of the government for resource mobilisation are bearing fruits, the outlook said, adding that the tax collection by the Federal Board of Revenue (FBR) exceeded the target by Rs41 billion during FY2021, owing to the effective enforcement measures.

Keeping in view the post-Covid economic recovery, it is expected that the revenue performance would improve further in the new fiscal year.

The continuation of the current fiscal strategy would ensure long-term fiscal discipline and sustainability, it added.

It also said the economic growth momentum has strengthened considerably since March and remained robust during the last quarter of FY2021.

The balance of payments data revealed strong expansion of imports of goods and services, especially in June. Imports in June 2021 increased $1.6 billion, compared with May due to the seasonal factors.

It is expected that in the coming months, imports of goods and services may settle below the level observed in June. The observed growth momentum is driven by the production side of the economy. This is also reflected in the exports of goods and services, which according to the balance of payments data increased around $0.5 billion in June, compared with May.

It is expected that the exports will remain at the same level and consequently trade balance in goods and services will improve in the coming months.

These expectations depend on the absence of unexpected shocks, for example, those that may be generated by the recently observed surge in domestic and foreign Covid-19 infections, the ministry added.

The remittances flows are expected to continue their momentum in the coming months. Taking these into account, as well as the other secondary income flows and the primary income flows, the current account is expected to remain in deficit slightly.

These developments require further monitoring for smooth continuation of economic activities.

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