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Govt sees rapid growth amid external account pressures

ISLAMABAD: The Ministry of Finance on Wednesday anticipated a surge in economic activities despite the uncertain pandemic situation but warned that transition to higher growth could build pressure on external accounts.

“In the transition towards a higher potential growth level, pressure can be built on external accounts,” the economic adviser’s wing of the finance ministry said in its Monthly Economic Outlook (MEO) for July, calling for close monitoring to ensure that the new growth strategy is sustainable without any macroeconomic imbalances as observed in the past.

The report said the objective of recent accommodative monetary and fiscal policies was to put Pakistan’s economy on higher growth trajectory and the economic recovery in Pakistan’s main exporting partners was making the external environment favourable. However, recent deadly floods in Germany, China, India, and North America may raise direct and indirect economic losses along the global supply and trade chains.

It said the surge in economic growth was expected to continue in FY22 on account of reopening of economic activities and acceleration in vaccination process. The risk of pandemic still exists, however, the government may not follow complete lockdown given the public behaves responsibly by following the Covid-related SOPs.

The report said the year-on-year (YOY) inflation rate was on a declining trend in the recent months and was expected to continue in the absence of any major shock. The Consumer Price Index (CPI)-based inflation decelerated to 9.7 per cent on YoY basis in June 2021 as compared to 10.9pc in the previous month. The average inflation for the entire fiscal year stood at 8.9pc.

On month-on-month (MoM) basis, it decreased by 0.2pc in June 2021 as compared to an increase of 0.1pc in the previous month and an increase of 0.8pc in June 2020. The prices of non-perishable food items increased by 12.9pc on YoY basis and declined by 1.7pc on MoM basis. It attributed the MoM inflationary impulses in July to the second round effect of previous increase in international commodity prices, from recent increase in gasoline prices, currency depreciation and monetary expansion.

Furthermore, the month of July tends to show a positive seasonal inflation effect. On the other hand, international food prices declined in June and continuously being monitored. The dividends of positive market intervention may ease the pressure on prices and as a result YoY inflation in July, 2021 is expected to decelerate keeping it in the range of 7.5-9pc.

The report said that despite significant challenges, the current fiscal performance was largely in line with government’s strategy to ensure fiscal discipline, increasing revenues and controlling expenditures. The continuation of current fiscal strategy would ensure long term fiscal discipline and sustainability.

The report said the economic growth momentum has strengthened considerably since March and has remained robust during the last quarter of FY21. Balance of payment data revealed strong expansion of imports of goods and services, especially in June. Imports in June increased by $1.6 billion as compared to May due to seasonal factors. It is expected that in coming months, imports of goods and services may settle below the level observed in June.

The observed growth momentum is driven by production side of the economy. This is also reflected in the exports of goods and services, which according to BOP data increased by about $0.5bn in June as compared to May. It is expected that exports will remain at the same level and consequently trade balance in goods and services will improve in coming months.

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