Remittances to keep the current account deficit “manageable”
ISLAMABAD: Highlighting two major challenges, notably the increasing current account deficit and higher inflationary pressures, the Ministry of Finance in its forecast relied on higher and stabilized remittances, the current account deficit would become then manageable and fundable. “Assuming stable remittances, the expected improvement in the trade balance will translate into lower current account deficits, so that these deficits remain manageable and fundable,” the finance ministry said in its update. monthly economic outlook and its outlook published here on Monday.
Regarding rising inflation, the ministry has taken a position that year-on-year (year-on-year) inflation has increased in recent months. The main contributor to inflation includes rising global commodity prices, electricity costs, house rents and transportation costs. However, the government is taking administrative, relief and policy measures to ease inflationary pressures in the coming months.
The finance ministry acknowledged that the current account deficit was touching 2018 levels when it reached $ 18 billion and that the PTI had always criticized the former PMLN government for inheriting a crumbling economy . “The current account posted a deficit of $ 7.1 billion (5.3% of GDP) for the fiscal year July-November 2022 against a surplus of $ 1.9 billion (1.6% of GDP). ‘last year. Previously, the current account deficit was $ 7.2 billion (5.5% of GDP) from July to November 2018, ”said the Ministry of Finance. The current account deficit has widened due to the steady increase in the volume of imports of energy and non-energy products, as well as an upward trend in global prices for oil, Covid-19 vaccines, food and metals. FOB exports increased 28.9% in fiscal year July-November 2022 to reach $ 12.3 billion ($ 9.6 billion last year).
Regarding inflation, the Ministry of Finance said that Pakistan’s inflation rate is determined by international commodity prices, the exchange rate, seasonal factors and the expectations of economic agents regarding the future development of these. indicators. Year-on-year inflation has increased in recent months. This increase in inflation is mainly due to the cost of electricity, fuel, house rents, transportation and non-perishable food items among the major contributors. The price adjustments were directly and indirectly induced by a recent exceptional increase in international commodity prices and exchange rate fluctuations. MoM inflation is expected to slow in December. International oil prices have retreated somewhat from previous highs. The exchange rate continued to depreciate slightly, but government efforts to mitigate the pass-through of high international food prices to domestic retail markets continue. At present, the government aims to increase agricultural productivity by taking multiple initiatives to ensure food security by controlling food inflation in the future.
“The low base effect may help keep December’s inflation rate in double digits. Although the expected probability margins are wide, it is highly likely that year-on-year inflation is expected to remain in double digits in December, but slightly lower than last month, ”the ministry predicted.
According to balance of payments (BOP) data, exports of goods and services increased by about 13% in November compared to October. They have now settled well above the USD 3 billion mark and are expected to rise further in the coming months in order to reach a new higher level for the foreseeable future. This good export performance is the result of several positive factors.
First, although the cyclical position of major trading partners, as evidenced by Composite Leading Indicators (CLI), appears to be stabilizing, the underlying growth trend in these countries remains very strong, following the resumption of growth from their potential output. Second, Pakistan’s real effective exchange rate has improved significantly in recent months. Third, domestic economic dynamism remains strong. Fourth, specific government policies aimed at boosting exports are bearing fruit. The main risk factor here is the appearance of a new variant of Covid-19, the effects of which on economic activity are still unknown. Balance of payments data further indicated that imports of goods and services increased by around 5% in November compared to October.
Strong domestic economic dynamism requires imported energy, capital goods and intermediate goods, necessary for the production process. In addition, the recent increase in international commodity prices has inflated the cost of these imported goods. However, imports could gradually stabilize at lower levels over the next few months. Imports are indeed likely to react to higher domestic interest rates, given the negative effect of historically observed interest rates on import demand.
In addition, the government continues to implement measures to curb unnecessary imports and provide domestic alternatives in some markets, especially food products. In addition, the baseline scenario is based on a downward correction in international commodity prices. Based on these events, the trade deficit will stabilize in the coming months. The expected developments in export and import activities imply that the trade balance could gradually improve over the next few months and stabilize at significantly lower levels during the second half of the current financial year.
The government’s fiscal consolidation efforts are bearing fruit in terms of improving fiscal accounts. In fiscal year July-October 2022, growth in net federal revenues outpaced growth in spending. As a result, the budget deficit was reduced to 1.1% of GDP in the first four months of fiscal 2022 from 1.7% of GDP in the same period last year. With prudent expenditure management and an effective revenue mobilization strategy, the overall budget deficit is expected to remain at a reasonable level. The RBF tax revenue is performing remarkably well and continues to exceed its revenue target in the first five months of the current fiscal year. This shows that FBR is on track to meet the assigned target for fiscal year 2022. It should be mentioned that various tax reforms are underway to improve documentation and make taxpayers as easy as possible, which will further improve tax collection. and support for the achievement of the target set for the current fiscal year.
In the first four months of the current fiscal year, Pakistan remains on a higher growth path, accelerating from the growth rate seen in fiscal 2021. However, inflation may subside as the year progresses. over the next few months due to falling commodity prices on the world market. In addition, relief can also come from the government’s continued efforts to lower food prices in local markets by following appropriate fiscal and monetary policies. While these developments and policies may control monthly price dynamics, the current pressure on the trade balance is expected to ease, easing pressure on exchange rates and subsequently stabilizing MoM inflation, the report concluded.