Floods push economic growth below budgeted target

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The economic growth for the fiscal year 2022-23 is likely to remain below the budgeted target due to devastation created by floods, the finance ministry said in a recent report released here on Friday.

“This combination of low growth, high inflation and low levels of official reserves is particularly challenging for policymakers,” says the Monthly Economic Update and Outlook for December 2022.

It says, as in many other countries, Pakistan’s economic activity remained currently below potential, implying a negative output gap. At the same time, again as in many other countries, inflation remained substantially above targets.

Furthermore, as is also the case in several other emerging economies, the global energy crisis, which has pushed up global commodity prices, also puts downward pressure on international official reserves.

According to the report, in the short run, demand management policies by Pakistan’s central bank and government were designed to fight inflation and protect official reserves and protect inclusive growth.

During the first five months of FY2023, Pakistan’s economy showed signs of resilience to domestic and global challenges. Despite facing inflationary pressures, trade and current account deficits are continuously showing improvement, which is a sigh of relief for financing challenges.

On the fiscal front, fiscal consolidation is the topmost priority to achieve the targeted fiscal deficit despite the government facing the unprecedented challenge of providing relief to people in flood-hit areas.

But in the long run, the government aims to stimulate the supply side to elevate the long-run potential growth rate of the economy.

Increasing the long-run growth trends of output, per capita real incomes and employment can only be achieved by stimulating investments in new production capacities and improving overall productivity.

According to the report, the inflationary pressure has started easing out as the Month-on-Month (MoM) Consumer Price Index (CPI) inflation declined from a massive high of 4.7 percent in October 2022 to 0.8 percent in November.

The same trend is witnessed in the Sensitive Price Indicator (SPI), which decelerated for three consecutive weeks in December, and would also be transmitted into CPI inflation of the current month.

Moreover, the recent government’s decision to provide relief to the masses by slashing the prices of petroleum products is expected to translate into lower costs of food and non-food for the general public.

SBP has announced an increase of 100 bps in the policy rate in order to curtail the inflationary expectation while the declining international commodity prices are expected to offset the inflation spikes that emerged due to domestic supply shocks.

On agriculture productivity, the report says, standing water due to recent floods may create problems in achieving the assigned wheat sowing target, however, the federal and provincial governments are working hard and committed to enhancing wheat productivity.

The Large Scale Manufacturing (LSM) output came in somewhat lower than expected on the basis of a baseline scenario.

It says, Foreign Direct Investment (FDI) reached $ 430.1 million during July-November FY2023 against $ 884.9 million last year, showing a decrease of 51.4 percent. On a MOM basis, FDI was recorded at $ 81.8 million in November 2022 as against an inflow of $ 94.9 million in October 2022.

In Jul-Nov FY2023, workers’ remittances were recorded at $ 12.0 billion against $ 13.3 billion last year, a decrease of 9.6 percent.

Pakistan’s total liquid foreign exchange reserves increased to $ 12.0 billion on December 21, 2022, with the SBP’s reserves standing at $ 6.1 billion. Commercial banks’ reserves remained at $ 5.9 billion.

The KSE-100 index closed at 42,349 points on November 30, 2022 while market capitalization settled at Rs 6,768 billion.—APP