Inflationary pressures posing risk to economic growth: Finance Ministry

Syed WajeehWeb Editor

28th Oct, 2021. 08:35 pm

ISLAMABAD: The Ministry of Finance has said that revival of domestic economic activities remained on track; however, the risk of inflationary pressure persists on account of both demand and supply conditions.

The Ministry of Finance in a Monthly Economic Update and Outlook for October 2021 said that the unprecedented increase in the global commodity prices is putting pressure on prices, as well as on the rupee.

The report said despite the risk of higher international commodity prices, the exchange rate depreciation and adjustments in the administered prices, the government’s pro-supply side policies, administrative and relief measures may neutralise the associated risks.

The report said significant improvement in the production of Kharif crop was reported in 2021. The production of sugarcane is estimated at 87.7 million tonnes (81 million tonnes last year), rice production at 8.8 million tonnes (8.4 million tonnes last year), while maize production at 9 million tonnes (last year 8.9 million tonnes).

Cotton production estimated at 8.5 million bales (7.1 million bales last year). The performance of LSM witnessed a broad-based YoY growth of 12.74 per cent in August 2021 on the back of improved business confidence and consumer demand. On MoM basis, LSM accelerated by 2.09 per cent as compared to -5.08 per cent in July 2021.

The overall growth of LSM during Jul-Aug FY 2022 clocked at 7.26 per cent reaching well above the pre-pandemic level.

The fiscal deficit in Jul-Aug FY2022 recorded at 0.9 per cent of GDP (Rs 462 billion). Expenditures under PSDP grew by 19 per cent to Rs 63 billion in Jul-Aug FY2022 against Rs 53 billion in the same period of last year.

Broad Money (M2) witnessed expansion of Rs89.7 billion in Jul-Sep FY2022 against expansion of Rs130.1 billion during comparable period last year.

The current account deficit declined by 24.4 per cent to $1,113 million in September, 2021 on M-o-M basis ($1,473 million in August, 2021) due to significant increase in exports and workers’ remittances.

The report said despite the risk of higher international commodity prices, exchange rate depreciation and adjustments in administered prices, the government’s pro-supply side policies, administrative and relief measures may neutralise the associated risks.

The main economic indicators is expected to remain strong, reflecting favorable macroeconomic environment and significant growth in LSM with multiplier effects in services sectors. Exports of goods and services crossed the $3 billion mark due to strong economic recovery in Pakistan’s main trading partners.

The momentum in domestic economic dynamism and pro-growth policies will keep exports above the $3 billion mark in the months ahead.

The Federal Board of Revenue (FBR) is focused on sustaining its successful streak of surpassing tax collection target during first quarter of FY2022.

It is expected that the momentum of tax collection will continue and FBR will achieve the revenue target set for FY2022.

The economic recovery accelerated since March 2021, is expected to continue on account of strong growth in agriculture (important and other crops) and manufacturing sectors.

The performance of commodity producing sector will accelerate activities in the services sector through multiplier effects.

Further, the government has lifted the Covid-related restrictions due to massive decline in the Covid-19 cases and higher vaccination. All these developments will further stimulate the confidence of economic agents. The economic expansion may go along with a current account deficit.

However, measures are in progress to curb the trade deficit at manageable level to ensure the external sector stability. As long as the deficits are financeable, their contribution remains productive for developing countries in achieving the higher growth trajectory, necessary for the convergence of their per capita incomes with developed countries.

During the period, 12 of the 15 subsectors of LSM have witnessed a positive growth. Automobile shows a massive growth of 55.33 per cent; iron and steel products, 14.34 per cent; pharmaceuticals, 18.67 per cent; leather products, 20.21 per cent, wood products, 15.81 per cent and chemicals grew 6.36 per cent.

The Consumer Price Index (CPI) inflation is recorded at 8.98 per cent in September 2021 as against 9.04 per cent in the same month last year.

During July-September FY2022, the CPI inflation recorded 8.58 per cent (8.84 per cent last year). The urban CPI inflation recorded at 9.1 per cent on YoY basis in September 2021, compared with 8.3 per cent in the previous month and 7.7 per cent in September 2020.

The rural CPI inflation, recorded at 8.8 per cent on YoY basis in September 2021, compared with 8.4 per cent in the previous month and 11.1 per cent in September 2020.

The oil prices [global benchmark Brent] in the international market had risen around $85/barrel, which were the highest since October 2018. More importantly, the entire energy chain prices have witnessed a strong surge in the last couple of months due to higher demand for energy inputs and supply bottlenecks.

The government had absorbed the pressure of increasing international rates and provided “maximum relief” to consumers by keeping the petroleum levy and sales tax to a minimum level.

The government will provide targeted subsidies (wheat, sugar and pulses) to 40 per cent of the population.

The current account posted a deficit of $3.4 billion (4.1 per cent of GDP) for July-September FY22 as against a surplus of $865 million (1.2 per cent of GDP) last year. Current account deficit widened due to constantly growing import volume of energy and non-energy commodities, along with a rising trend in the global commodity prices, COVID-19 vaccines, food, and metals. Exports on fob grew by 35.2 per cent during Jul-Sep FY2022 and reached $7.2 billion ($5.4 billion last year). As per PBS, during July-September, FY22, exports increased by 27.9 per cent to $ 6.9 billion ($5.5 billion last year).

The exports grew by 27.7 per cent to $2.4 billion as against $1.9 billion last year, on the back of rising demand from global market along with exports promotion policies of the government.

The major exported commodities which have grown well during the review period included knitwear (32.9 per cent), readymade garments (22.8 per cent), bed-wear (23.3 per cent), cotton yarn (69.3 per cent), cotton cloth (21.9 per cent), chemical and pharmaceutical products (61.9 per cent), leather manufactured (5.9 per cent), fruits (22.8 per cent) and basmati rice (26.9 per cent).

The increase in the overall exports is contributed by the growth in exports of value-added sectors. The total imports in July-September FY22 increased to $18.7 billion ($11.3 billion last year), posting 66.1 per cent growth.

The main imported commodities were petroleum products, palm oil, petroleum crude, iron and steel, liquefied natural gas, medicinal products, plastic materials, textile machinery, electrical machinery and apparatus, power generating machinery and raw cotton.

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