ISLAMABAD: The Ministry of Finance on Thursday cautioned that heavy monsoon rains have adversely affected major and minor crops, which may impact the country’s agricultural performance and its overall economic outlook.

The torrential rains and floods during July and August have adversely affected the standing kharif crops, especially cotton. Assessment of the crop damages was in progress by the provinces, but significant losses could be witnessed, said the Economic Adviser’s Wing (EAW) of the Ministry of Finance in its Economic Update and Outlook for August.

It said the present situation depicts inundated cotton fields mostly in Sindh, Balochistan and southern districts of Punjab.

Global and domestic uncertainties surround the economic outlook. 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 International Monetary Fund’s (IMF) requirements.

Finance ministry report says heavy crop losses expected as provinces assess damages

The update said these have further increased inflation but also have the positive effect of alleviating the external financing constraints. The months of June and July witnessed a significant year-on-year increase in inflation due to the higher global commodity prices and rupee depreciation.

The inflationary pressure may continue in the current month, even if there would be no further month-on-month increase in inflation, as prices of essential items are significantly higher than the last year.

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 a year ago.

Taking into account, the expectation that domestic retail prices may further increase compared to July, even if there would not be another month-on-month increase in August, the year-on-year inflation will settle at nearly the same level as observed in July.

As expected, the large-scale manufacturing (LSM) output stabilised in June as compared to May and its year-on-year growth rate remained on a positive trend. In July, international economic slowdown and domestic negative seasonal effects may drag down LSM compared to its June level. However, on a year-on-year basis, LSM may stabilise or show limited growth.

The report said inflation has continued to accelerate in recent months, mainly due to supply shocks that have created significant monthly impulses on the CPI level. If these monthly impulses can be contained to more normal levels in the coming months, inflation may start to decelerate. But even then, year-on-year inflation may stay in double digits for the rest of the ongoing fiscal year.

Economic growth remains positive. But restrictive demand management and high inflation may cause Pakistan’s cyclical position to deteriorate in the coming months. This cooling off may bode well for the trade balance and by extension for the current account balance, official reserves, and the exchange rate.

On the other hand, recessionary tendencies in major markets of Pakistani goods may contain exports. Besides, Pakistan’s rupee has significantly depreciated in recent months, and it appreciated again in June. The current account balance is expected to improve considerably in the coming months.

The new agreement with the IMF ensures that Pakistan’s external financing needs will be met. This opens room for further implementation of supply-side policies that should elevate Pakistan’s potential growth rate to a higher sustainable level.

One essential necessary condition for this to happen is a drastic increase in Pakistan’s propensity to invest. Physical and human capital accumulation and productivity enhancement are the essential ingredients to upgrade Pakistan’s sustainable long-run growth path, the report said.

Published in Dawn, August 26th, 2022