Daily Times

Although the national economy has achieved gross domestic product (GDP) growth of 5.97 percent in FY2022, yet the fiscal situation and external sector performance are making it difficult to sustain and are impacting the growth outlook in the coming year 2022-23.

The Ministry of Finance said this in

its monthly Economic Update and Outlook for May 2022. It said the government is taking all possible measures to counter the downside risks associated with the economy.

The ministry said Pakistan is currently facing several severe challenges: accelerating inflation, high external deficits, exchange rate depreciation, declining foreign exchange reserves and mounting uncertainty. On the other hand, economic growth remains relatively high, but in the presence of macroeconomic imbalances may not be sustainable.

According to the ministry, the international commodity prices are on a rising trend and expected to increase further. The pass-through of the increase in global commodity prices is somewhat contained due to government measures. Even then it is expected that CPI inflation will remain in double digit in May 2022.

The ministry said that MEI remained

strong in March 2022 due to the unprecedented growth in LSM. However, continuing geopolitical tensions, high commodity prices and contractionary monetary policy may slow down economic activities in coming months.

The ministry said that exports of goods and services remained strong in April 2022 and it is expected that this positive trend will continue in May 2022 on the back of exports-oriented policies and growth recovery in Pakistan’s main export partners. On a month-on-month basis, the growth in imports of goods is expected to be negative due to the ban on nonessential and luxury items. Moreover, remittances are expected to be around $2.5 billion. Taking these factors into account, the current account will stay well below $1 billion in coming months. It said that during the first ten months of the current fiscal year, the Federal Board of Revenue (FBR) exceeded its revenue target by 5.2 percent. Despite massive tax relief on various essential items to the common man, FBR has been able to achieve a sizeable tax collection. FBR has taken various policy and administrative measures which paid off in terms of improved tax collection. It is expected that FBR would be able to achieve its target during FY2022.

In fact, the depreciation of the rupee both against the US dollar and on a trade weighted basis against the currencies of Pakistan’s main trading partners is primarily a reflection of inflation differential between Pakistan and its main trading partners. Further relatively high domestic inflation is compensated by rupee depreciation. However, currency depreciation itself feeds into higher domestic inflation.

In this sense, Pakistan is caught into a vicious inflation/currency depreciation spiral. In the short run, a predicament to stop this cycle is to pursue restrictive fiscal and monetary policies, coupled with policies and announcements that restore market agent’s confidence.

In the longer run, Pakistan’s main problems can be solved by designing a credible sustainable future economic trajectory that inspires consumers and investors’ confidence. Economic decisions are based on expectations about the future economic path as well as on the degree of certainty confidence of development prospects.