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Wednesday, May 22, 2024

Finance Ministry presents grim picture of economy post flood damage

The Ministry of Finance has hinted at modifying macroeconomic targets for the current fiscal year due to floods.

The Ministry of Finance has hinted at modifying macroeconomic targets for the current fiscal year due to floods, which had a detrimental impact on the farm sector and slowed growth (2022-23).

The issues facing Pakistan’s external environment are growing. According to the Ministry of Finance’s monthly economic update and outlook report, which was released on Friday, “recent floods have had a detrimental impact on crops, changing the economic outlook primarily through agriculture performance.”

The current administration will be forced to renegotiate significant targets with the International Monetary Fund (IMF) for the current fiscal year 2022–2023 as a result of the change in macroeconomic targets. The analysis argued that Pakistan’s economic outlook has deteriorated throughout the course of the current fiscal year and is likely to stay below target.

“Macroeconomic imbalances may ease with the expected slowdown in the economic growth” stated the Finance Ministry report.

International food and oil prices exceeded the upper limit of the ranges seen during the previous two decades in March 2022, putting pressure on inflation in Pakistan as well. Due to delayed adjustments and second-round effects, domestic inflationary pressure might persist even if international commodity prices mean-revert soon.

“Besides, the depreciation of the Pakistani currency continues to exert upward pressure on domestic prices. At the same time, recent exceptional floods have destroyed human, physical, and livestock capital and deprived many families of their assets and incomes,” added the report.

The generation of gross value added and, consequently, economic growth will be impacted by the loss of lives and property. The latter was already under pressure from the rest of the world’s fragile economic conditions, the required fiscal austerity, rising interest rates, and inflation.

It claims that there are still geopolitical disputes today. The future of the economy is surrounded by both internal and global concerns. The worldwide prognosis for 2022 has been impeded by high inflation, aggressive monetary tightening, and uncertainty due to the conflict and pandemic in Ukraine.

Rising food and energy costs are depleting real incomes and creating a global crisis in terms of cost of living for disadvantaged areas. Other nations are being impacted by the slowdown in the US, China, and the EU.

On the basis of forward-looking data, a further slowdown in global growth is anticipated. Rising government borrowing rates and capital outflows intensify fiscal and BOP pressures in many developing nations.

Because the monthly basis price rises have been dropping over the past two months, inflation has begun to revert. However, from June to August, there was a noticeable acceleration in the inflation rate year over year. The Pakistani rupee has been losing value versus the US dollar since March. One concerning issue is the terrible consequences of recent floods, which severely damaged a significant portion of crops.

Read More: Pakistan won’t default despite catastrophic floods: Miftah

The government is making an effort to increase commodity supplies by enabling trade with nearby nations. However, there is still a chance that recent inflationary shocks would have secondary impacts that could eventually affect the markets. It’s interesting to note that the monthly inflation rate exhibits positive seasonality in the month of August. The recent sharp accelerations of the monthly inflation rate, however, might come to an end in September.

The output of both major and other Kharif crops has decreased severely as a result of recent floods and unusually strong monsoon rains, thus the agricultural prognosis is still unclear. The seeding of Rabi crops may also be impacted by the standing water in the agricultural areas.

The industry most sensitive to changes in global markets is large-scale manufacturing, as indicated by the large-scale manufacturing (LSM) index (rebased on prices of 2015–16). The main trading partners’ cyclical movements are tracked by the LSM cycle. The growth trajectory of economic activity appears to have slowed down since the beginning of the current fiscal year.

The decline in global economy, the small rate of manufacturing growth each year, high domestic inflation, declining real incomes, and rising production costs are all signs that support this conclusion. Most likely, the recent floods’ economic impacts have not yet been factored into the figures.

The balance of payments data show that the trade deficit somewhat decreased in July. Both imports and exports grew more robustly. The base case forecast predicts that imports would moderate in the upcoming months as domestic growth slows. At the same time, exports would stabilise with the assistance of a real effective exchange rate that was generally stable and at historically low levels.

The trade balance may therefore be anticipated to improve. Remittances are predicted to remain at around the same levels. This would direct the current account balance towards further improvement, along with the anticipated trajectory of the trade balance and other main and secondary revenue transactions.

The effects of the latest floods, however, could substantially alter the scenario. These could reduce export capacity while also increasing the number of imports needed to meet the demand for the products and missed harvests. Budgeted to drop to 4.9% of GDP for the current fiscal year, the primary balance is expected to be in surplus by Rs153 billion.

The budget was created with the intention of stabilising economic development, raising taxes, rationalising spending through careful budgeting, boosting exports, and safeguarding the weaker members of society through assistance programmes and pro-poor initiatives.

However, the extensive damage caused by the high flooding has had a significant negative impact on Pakistan’s economy. The analysis came to the conclusion that this will have a negative effect on the government’s financial status from both the revenue and expenditure perspectives.