ISLAMABAD: Highlighting fiscal risks at the end of the current fiscal year, the Ministry of Finance (MoF) on Tuesday wished the inflation peaking at 34-36 per cent this month would start descending owing to the ease in international commodity prices that would absorb the negative impact of currency depreciation.

“The inflation may remain in the range of 34-36pc for May,” said the ministry in its monthly economic update and outlook, adding that there are certain downside risks to the financial sector towards the end of the current fiscal year.

“These risks may emerge due to higher-than-expected expenditures mainly due to rise in debt servicing costs and higher expenditures for the flood rehabilitation activities”, it said. Similarly, on the revenue side, the Federal Board of Revenue (FBR) collection increased by 16.1pc during July-April FY23, however, it remained less than the target.

The slowdown in economic activity and import compression explain a substantial portion of the lower-than-expected tax revenue during the review period. Recognising these issues, the government was taking steps to reduce non-productive spending through austerity measures and focus on targeted subsidies.

Says inflation may decelerate with improvement in global supply chain

The ministry’s Economic Advisors’ Wing attributed the potential reasons for the rising price levels to flood damages, disruptions in supply chains, devaluation brought by the macroeconomic imbalances and political uncertainty.

It said the improvement in the global supply chain will ease out domestic prices in the coming months. The global commodity prices fell 14pc in the first quarter of 2023 and by end-March, they were roughly 30pc lower than their historic peak in June 2022.

“The favourable international commodity price outlook is expected to offset the negative impact of currency depreciation”, the report said. In addition, the better crop outlook due to timely measures i.e., Kissan Package and expected political stability would help to achieve price stability. The recent decrease in administered prices of petrol and diesel prices will be transmitted into lower domestic prices of essential items by impacting the transportation cost.

The cyclical position in Pakistan’s main export markets showing some signs of stability since January. However, large-scale manufacturing (LSM) activity is recorded below its natural capacity level since the start of FY23 owing to necessary policy measures to cool down the overheated economy and to avoid default on its external liabilities. The downside risks of supply disruptions, inflationary pressures, synchronised policies, and high base effect are continued to prevail, which will have an impact on the LSM output in the coming months.

The report noted that the trade deficit of goods and services decreased by 45.4pc year-on-year in 10 months while it increased by 12.5pc month-on-month in April. The Real Effective Exchange Rate stabilised which implies that Pakistan’s inflation differential has been largely compensated by the nominal depreciation of the rupee. For the remaining months, it is expected that the exports and imports will follow their trend pattern as observed during the second half of the current fiscal year. These projections implied an improved balance of trade in goods and services.

Remittances decreased by 12.9pc month-on-month and returned to a normal trend after observing a spike in March due to Eidul Fitr-related factors. It is expected that remittances will increase in the coming months due to Eidul Azha and improvements in the global and domestic environment. Taking into account all other secondary and primary income payments and receipts, the current account deficit is expected to remain within a sustainable limit.

While noting the 0.29pc provisional economic growth rate for the current fiscal year, the report attributed this to many challenges emanating from the uncertain external and domestic economic environment. These challenges triggered CPI inflation to remain on a higher trajectory despite monetary tightening primarily due to the rupee depreciation.

External payments also remained burdened due to lesser foreign exchange inflows. Fiscal consolidation, adopted by the government during the outgoing year, has supported economic sustainability.

Rehabilitation of agricultural activities during the kharif season will also have a positive effect on economic growth. “Overall, the appropriate policy mix is expected to bring prosperity, economic growth, and improved supply chain”, the outlook hoped.

Published in Dawn, May 31st, 2023