The average monthly economic indicator (MEI) for the first five months of the current fiscal year (2021-22) indicates that the average economic growth of the country during the period could be estimated at around five per cent.
According to the monthly report issued by the ministry of finance and revenue on Monday, in the current fiscal year, Pakistan remains on a higher growth trajectory, accelerating from the growth rate observed in FY2021. However, it said the inflation may ease out in the coming months due to the declining commodity prices in the global market. In addition, relief may also come from continuous government efforts to soften food prices in the local markets by following appropriate fiscal and monetary policies.
While these developments and policies may keep the monthly price dynamics in check, the current stress on the trade balance is expected to soften, easing exchange rate pressure and subsequently stabilising the month on month (MoM) inflation. The Monthly Economic Indicator (MEI) is based on combining monthly data of indicators that are correlated with GDP at constant prices. Since March 2021, the MEI is on a higher level as compared to the previous months.
This is based on observed favourable movements in macroeconomic high-frequency indicators such as growth in LSM (which is known to exert strong multiplier effects in services sectors), recovery in Pakistan’s main trading partners and strong growth in imports of capital goods. The momentum in the economic dynamism observed in recent months is expected to support economic activity in November.
According to the balance of payment (BOP) data, exports of goods and services increased by around 13 per cent in November as compared to October. They have now settled well above the $3 billion mark and are expected to climb further in the coming months so as to reach a new higher level for the foreseeable future.
This strong export performance is the result of several positive factors. First, although the cyclical position in the main trading partners (as witnessed by the CLI) seems to stabilise, the underlying growth trend in those countries remains very strong, following the recovery in their potential output growth.
Second, Pakistan’s Real Effective Exchange rate has been improving significantly in recent months.
Third, the domestic economic dynamism remains strong. Fourth, specific government policies to stimulate exports are bearing fruit. The main risk factor here is the appearance of a new COVID-19 variant, of which the effects on economic activity are still unknown.
BOP data further indicated that imports of goods and services increased about 5% in November compared to October. Strong domestic economic dynamism requires imported energy, capital goods and intermediate goods, necessary in the production process. Furthermore, the recent increase in international commodity prices has inflated the cost of these imported goods. However imports may settle at lower levels gradually in the coming months. Imports are indeed expected to react to higher domestic interest rates, given the historically observed negative interest rate effect on import demand.
Furthermore, the government continues implementing measures to curb unnecessary imports and to supply domestic alternatives in some markets, especially food products. Also, the baseline scenario is based on a downward correction of international commodity prices. The report added that based on these events, the trade deficit will stabilise in the coming months.
The expected developments in export and import activities imply that the trade balance may gradually improve in the coming months and settle down at significantly lower levels in the second half of the current FY. Assuming stable remittance inflows, the expected improvement in the trade balance will be reflected in declining current account deficits, such that these deficits remain manageable and financeable.
The government’s fiscal consolidation efforts are paying off in terms of improved fiscal accounts. During July-Oct FY2022, the growth in net federal revenues outpaced the growth in expenditures.
