Abdul Wajid Khan

With the global and domestic uncertainties still surrounding Pakistan’s economic outlook, the devastating floods caused by abnormally heavy monsoon rains in July and August may diminish the country’s economic prospects in the coming months. This was highlighted in the latest monthly economic outlook released by the ministry of finance, reports WealthPK. The report points to contraction in global gross domestic product (GDP) in the second quarter of 2022 due to persistently higher inflation, monetary tightening, Covid-19-related restrictions and the Russia-Ukraine conflict.

It is pertinent to mention here that the World Economic Outlook for 2022 forecasts the global GDP to grow by 3.2% during the ongoing year, down from 6.1% in 2021. The ministry of finance’s monthly outlook report points out that the torrential rains and the resultant massive floods in July and August adversely affected the standing Kharif (summer) crops, particularly cotton, incurring significant losses on farmers.

The report highlights that floods caused by torrential rains have inundated cotton fields over a vast area, mostly in Sindh, Balochistan and southern districts of Punjab. It says assessment of the damage caused to crops was in progress by the provincial governments. The report says though current account deficit came down to $1.5 billion in July 2022, the month witnessed a significant increase in inflation year-on-year due to higher international commodity prices and depreciation of the rupee. It predicts sustained inflationary pressures in coming months on significantly higher prices of essential items.

It emphasizes that the composite leading indicator in Pakistan’s major export countries continued to follow a downward trend due to supply chain bottlenecks and geopolitical tensions. However, overall economic growth remains positive due to a continuing high growth path of potential output. The trade balance on goods and services improved significantly in July compared to June 2022, and it is anticipated that this trend will continue in the coming months.

In addition, it is anticipated that remittances will reach around $3 billion a month in coming months. Thus, taking into consideration the anticipated trajectory of the balance on goods and services as well as other components, the current account balance may gradually approach equilibrium in coming months. The government is confident to achieve the fiscal targets through resource mobilisation and prudent expenditure management in FY23. The ministry of finance says the economic outlook is surrounded by global and domestic uncertainties like mounting geopolitical tensions, high worldwide inflation, rising interest rates and the strong US dollar, throwing Pakistan’s external environment into an extremely challenging position.

However, domestically, the government has taken necessary measures to comply with the requirements of the International Monetary Fund to get the loan bailout package approved. Though these measures have further increased inflation, they have alleviated external financing constraints to some extent. The ministry’s monthly economic outlook report says though economic growth remains positive, restrictive demand management and high inflation may cause Pakistan’s cyclical position to deteriorate in coming months. However, this cooling off may bode well for the trade balance, the current account balance, official reserves and the exchange rate.

The report points out that with external financing needs met following the agreement with the IMF, the government would be able to further strengthen the supply-side policies to help elevate Pakistan’s potential growth rate to a higher sustainable level. In this regard, physical and human capital accumulation and productivity enhancement are essential to upgrade Pakistan’s sustainable long-term growth path.

Credit: Independent News Pakistan-WealthPak