ISLAMABAD: In an apparent move to manage high expectations, the caretaker government on Wednesday said the economy continues to face both domestic and external challenges and “massive” petroleum price hikes twice in August and heavy electricity price shocks would keep inflationary pressures at elevated levels in coming months.

“The two massive fuel price hikes witnessed in August and upward adjustment in energy tariffs, would strain the inflationary pressures in the coming months”, said the Economic Advisors’ Wing of the Ministry of Finance in its monthly economic update & outlook for August that was delayed for more than a week pending approval by caretaker finance minister Dr Shamshad Akhtar.

Besides the oil and electricity rates, sugar prices have been witnessing continuous rise over the past few months, and price pressure was now shifting to wheat prices while oil prices are coming to haunt the people with lagged transportation costs. “The rise in fuel prices drives a broad-based increase (in prices) by impacting the transportation cost”, the Ministry of Finance said.

The report said the international food price index tracked by Food & Agriculture Organisation (FAO) had slightly decreased in July when compared to the same month last year which could ease out domestic prices and the high base effect of over 29pc rate of inflation last year could provide a “little solace to inflation growth” and expected lagged impact of accumulated monetary tightening, fiscal consolidation efforts and better growth outlook would help easing out inflationary pressures in the second half of FY24.

Cotton production

The MoF forecasts that the extension of Kissan Package 2022 will certainly have a positive impact on the agriculture sector which in turn raises the livelihood of the farmers and will contribute to achieving the targeted growth for FY24.

Cotton arrivals have increased due to the improved seed quality, the ministry said, and hoped the recent year’s target of 12.77 million bales will be achieved with the use of improved quality of seed in both Sindh and Punjab.

On the other hand, it said the Large-Scale Manufacturing (LSM) cycle usually followed the cyclical movements in the main trading partners, but since it is focused on the main industrial sectors and not on total GDP, it is somewhat more volatile than the cyclical component of GDP in Pakistan’s main export markets.

The aggregate CLI in the main export markets remained relatively stable showing no significant upward movement. As expected, the cyclical LSM pattern in June remained negative due to the high base effect and deterred economic environment. However, for July, the pressure is expected to ease out on the back of a significant rebound in cement despatches indicating a rise in construction activities and the removal of import restrictions. Some provisional data on monthly economic indicators (MEI) showed some revival of economic fundamentals in July 2023 raising hopes about the foundation of inclusive growth that is expected to be positive throughout the current fiscal to achieve the targeted growth of 3.5pc.

Balance of payments data for July showed exports of goods and services continued to observe last year’s trend and declined by 3.2pc and 1.4pc, respectively, on a year-on-year and month-on-month basis. However, imports have changed their behaviour after lifting the restriction, which increased by 29.8pc month-on-month in July. This has been translated into a trade deficit of goods and services, widened from $1.18 billion in June to $2.4bn in July. Similarly, remittances decreased by 19.3 and 7.3pc on YoY and MoM basis respectively. As a result, the current account turned to a deficit of $809m against a surplus of $504 million in June.

For the outlook, imports will gradually increase in the coming months to increase economic activities. However, exports are facing both global and domestic headwinds which may hinder growth. Taking other factors into account, the current account will remain around the same level observed in July the MoF forecast.

Published in Dawn, September 7th, 2023