ISLAMABAD: Hinting at a further increase in the policy rate by the State Bank of Pakistan, the Ministry of Finance anticipates ‘blurred growth prospects’ for the economy, which could be marred by the prevailing inauspicious global environment and higher domestic inflation, going beyond 15 per cent, in the upcoming fiscal year set to begin on Friday.

“Despite achieving the growth of 5.97pc in FY2022, the underlying macroeconomic imbalances associated with domestic and international risks are making growth outlook indistinct,” said the ministry’s Economic Adviser’s Wing (EAW) in its Monthly Economic Update for June & Outlook.

At the same time, the EAW also warned that SBP’s demand management policy was unlikely to be successful in the face of supply side constraints and higher international commodity prices and may further cause erode to income levels.

“Economic growth in Pakistan is facing challenging situation due to wider macroeconomic imbalances,” the report said, though highlighting that the current account deficit, which remained high during the first three quarters, may decelerate by the end of this fiscal year and onwards.

‘Inauspicious’ global environment, higher domestic inflation blamed for ‘blurred growth prospects’

It said the delayed pass-through of international oil prices into domestic energy products was expected to increase inflation even though inflationary pressure may ease once international commodity prices start to decline and stabilise.

Going forward, Pakistan’s growth prospects are expected to remain satisfactory. But the number of potential risks may diverge it from optimal path. First, the cyclical position of Pakistan’s main trading partners is somewhat deteriorating. Their central banks are raising interest rates to counter inflation, thus leading to possible recession in those countries.

“Second, SBP may further raise domestic interest rates,” said the economic outlook, warning that SBP’s demand management policy may not be very effective as the current waves of inflation are largely caused by supply constraints and increasing international prices, especially commodity prices. “Exchange rate depreciation is also a source of concern as it makes the imported raw material more expensive,” it added.

Third, the persistent rise in domestic consumer prices is eroding real incomes, limiting the spending power of consumers and investors. “These risk factors may challenge the macroeconomic environment and growth prospects”, especially by negatively affecting the temporary cyclical output gap.

The report argued that the economy would tend back to potential output in the long runs provided sound responses lay the basis for a sustainable long-run growth trajectory. This should be accompanied by measures that aim to strengthen the growth of Pakistan’s potential output. These measures need to include the creation of a beneficial investment climate, confidence promotion and stimulus for promising economic initiatives with high growth potential. The current account balance may profit from sound demand management policies.

In the longer run, elevating the growth rate of potential output reinforces the supply side of the economy, accompanied by neutral demand management, will bring the current account balance (CAB) onto a long-run sustainable path.

The report said the government has withdrawn subsidies on fuel and energy products to control the mounting twin deficit and resultantly a sharp increase in prices of all petroleum products is witnessed.

“Further, the recent rise in international commodity prices, especially energy and food, will also be translated into domestic prices,” it conceded, adding that in this scenario, year-on-year inflation is expected to accelerate in June and may remain within the range of 14.5-15.5pc.

The report said the country’s industrial activity was vulnerable to external conditions, including cyclical impact of Pakistan’s main export markets. The agriculture growth is projected at 3.9pc for next year, but the target is mainly contingent upon a series of factors like revival of cotton and wheat production, consistent availability of water, certified seeds, fertilisers, pesticides and agriculture credit facilities.

The report noted that the expansion in US economy was slowing amid headwinds from Russia-Ukraine conflict, surging energy and food prices, reversal of stimulus programmes, tighter monetary policy, and Chinese lockdowns.

Published in Dawn, June 30th, 2022

Follow Dawn Business on Twitter, LinkedIn, Instagram and Facebook for insights on business, finance and tech from Pakistan and across the world.

Opinion

Editorial

Disregarding CCI
Updated 04 Nov, 2024

Disregarding CCI

The failure to regularly convene CCI meetings means that the process of democratic decision-making is falling apart.
Defeating TB
04 Nov, 2024

Defeating TB

CONSIDERING the fact that Pakistan has the fifth highest burden of tuberculosis in the world as per the World Health...
Ceasefire charade
Updated 04 Nov, 2024

Ceasefire charade

The US talks of peace, while simultaneously arming and funding their Israeli allies, are doomed to fail, and are little more than a charade.
Concerning measures
Updated 03 Nov, 2024

Concerning measures

The govt must seek political input and consensus on the changes it is seeking to make and be open about its intentions.
Short-lived relief?
03 Nov, 2024

Short-lived relief?

POLICYMAKERS must be jumping with joy. At the close of the first quarter of FY25, the budget posted a consolidated...
Brisk spread
03 Nov, 2024

Brisk spread

THE surge in polio cases has reached distressing levels with a tally of 45 last reported, after two cases emerged in...