ISLAMABAD: Highlighting ‘imme­nse pressures’ on fiscal account owing to revenue collection challenges, heavy interest payments and rehabilitation spending, the government on Tuesday increased its inflation forecast to 26 per cent — more than double the budgeted 11.5pc target.

“The Consumer Price Index (CPI) inflation on a year-on-year basis for January is forecast in the range of 24-26pc,” said the Ministry of Finance in its Monthly Economic Update & Outlook, adding that the recent political and economic uncertainties both were causing inflationary expectations upward.

The ministry also makes an upward revision in its inflation forecast to 24-26pc for the year, up from 21-23pc it had estimated in December. Yet the ministry appeared to be still underestimating the inflation as it already reached about 25pc last month and the impact of subsequent increases in interest rate, devaluation and increase in energy and fuel rates was yet to translate into CPI.

The report said the government was currently facing the difficult task of supporting vulnerable segments of society and meeting other public spending needs, in particular, rising interest payments on debt servicing.

However, spending management and domestic resource mobilisation had helped confine the fiscal deficit at the same level of 1.4pc of GDP as last year but the primary balance surplus was also maintained during the first five months.

Revenue shortfall key challenge to fund rehabilitation spending, debt servicing

“Nonetheless, rising interest payments due to increase in domestic and foreign interest rates, as well as flood-related spending, can put extensive pressure on overall spending”, the ministry warned and conceded that FBR tax collection has increased by about 17pc despite import compression and yet registered a shortfall of Rs217bn in the first half of the current fiscal year.

“In light of current global and domestic economic conditions, FBR facing a difficult task in meeting the full-year target”, it said.

In the absence of adequate fiscal space to mitigate the impact of various shocks on the economy, the government’s options would be to reallocate expenditures toward critical areas while improving spending efficiency; and raising revenue by broadening the tax base, making the tax system more progressive, and reducing tax avoidance and evasion.

The report said Pakistan was currently confronted with the challenges like high inflation, low growth, and low levels of official foreign exchange reserves.

The ministry said that fiscal consolidation was key to saving official reserves and exchange rate stability, which could be temporarily costly in terms of growth prospects in the short term, but long-run prosperity and growth can only be achieved by augmenting the country’s long-term equilibrium growth path by expanding production capacities and productivity.

Due to the dry condition, the Rabi crops especially “wheat” would need to be irrigated for healthier growth at the initial stages.

The cyclical position of Pakistan’s main trading partners remained in the negative territory since April 2022. In November, LSM activity came in as expected, implying no unexpected shocks appeared in that month.

Although some recovery in the LSM cyclical position occurred in November, the LSM output remained substantially below its potential, thereby following the cyclical downturn in the economies of Pakistan’s main export markets.

Published in Dawn, February 1st, 2023