ISLAMABAD - The Ministry of Finance has warned that inflation is expected to stay at elevated level owing to market frictions caused by relative demand and supply gap of essential items, exchange rate depreciation and recent upward adjustment of administered prices of petrol and diesel.
Inflation measured through Consumer Price Indicator (CPI) has at 31.5 percent in February, 2023. “Inflation in March may remain in upper bound as observed in the month of February,” said the ministry in its monthly report. It noted that inflation is expected to stay at elevated level owing to multiple aforementioned reasons.
The report stated that due to the lagged effect of floods, the production losses especially of major agriculture crops has not yet been fully recovered. Consequently, the shortage of essential items has emerged and persisted. Inflation may further jack up as a result of second round effect. Another potential reason of rising price level is the political and economic uncertainty. The economic distress resulting from delay of stabilization program has exacerbated the economic uncertainty due to which inflationary expectations have remained strong.
Despite SBP’s monetary policy, the inflationary expectations are not settling down. Moreover, the bulk buying during the month of Ramadan may cause demand supply gap and result into prices of essential items to escalate.
Recent monetary policy restrictions and efforts towards fiscal consolidation along with the administrative, policy and relief measures are expected to ease out the inflationary pressure by the end of the current fiscal year, it noted.
The fiscal deficit has been reduced to 2.3 percent of GDP during Jul-Jan FY 2023, down from 2.8 percent of GDP in the same period previous year, while the primary balance is in surplus due to significant decline in non-markup expenditures. On the revenue side, FBR tax collection currently is growing at 18 percent despite unprecedented challenges due to slowdown in economic activity and import compression. However, the current performance indicates the resolve of the government to optimize the revenue collection and to achieve the full year target.
According to the report, the current account deficit likely to remain on lower side. For the month of March, it is expected that exports and imports will remain at current level due to slow growth in the major trading partners and contained domestic economic activities. However, remittances will probably further improve due to positive seasonal and Ramzan factor. Taking these factors into account as well as other components, the current account deficit will likely to remain on lower side.
The trade deficit in goods and services declined significantly by 30.8 percent on YoY basis; from $2.6 billion in Feb 2022 to $1.8 billion in Feb 2023. However, on MoM basis, it increased marginally to $1.8 billion compared $1.7 bn in January. Exports of goods and services decreased marginally on MoM basis to $2.77 billion as compared $ 2.8 billion in January. On the YoY basis, it declined by 19.2 percent. Imports of goods and services has continued to contain and decreased by 24.2 percent on YoY basis. Remittances increased by 5.0 percent on MoM basis to $2.0 billion in February 2023 as compared $1.9 billion in January 2023, due to the improved situation after narrowing down differences between the inter-bank and open markets, subsequent allowing adjustments of the exchange rate. Other factor which contributes mainly in current account improvement for the month of February, is balance on primary income which contained by $200 million. Accordingly, the current account deficit contained to $74 million as compared $230 million in January 2023.
Despite challenges and uncertainties, economy is showing continuous signs of resilience as depicted through contained fiscal and current account deficit during the current FY. Furthermore, Pakistan is currently confronted with a shortage in external liquidity.
Through demand management policies, government is trying to limit the current account deficit, which will not transfer further pressure on dwindling reserves. Moreover, the Government is firmly inclined to successfully complete the IMF’s EFF program, which includes necessary policy measures and will bring additional relief to the financial account of the balance of payments.
The policy measures are intended to bring expenditures more in line with the income generated within the country. At fiscal front, Government is pursuing fiscal consolidation in order to reduce the overall fiscal deficit through expenditure management, austerity measures, and revenue mobilization.