Virus surge, restrictions threaten economic recovery

ISLAMABAD: The federal government has admitted that Pakistan’s nascent economic recovery is faced with downside risks owing to the second wave of Covid-19 at home as well as in major trading partners though inflationary pressures are easing out.

“Looking at the impact of the ongoing coronavirus, the downside risks are becoming prominent,” stated the monthly economic update and outlook for November report of the finance ministry released here on Friday.

Economic recovery that had started since the beginning of the new fiscal year continued in October, but effects on the economic outlook would depend on the intensity and duration of restrictions being imposed on some sectors and areas of economy, it said.

The ministry acknowledged that fiscal deficit as of Nov 20 increased by almost 70pc when compared with the same period of last year even though development expenditure remained almost flat.

Fiscal deficit broadens by nearly 70pc, says finance ministry’s outlook report

The recent increase in number of coronavirus cases is forcing the government to follow a careful policy, especially in services sectors, it said. Thus, like rest of the world, economic outlook for Pakistan was also having a mixed message. If the SOPs were strictly followed by the general public, the negative impact could be dampened and economy would return to long-term sustainable growth path, the ministry noted.

Also, reports about the production of several very successful new vaccines may open the scope for opening a back-to normal path in the near future, it observed, adding that such developments could boost business and consumer confidence and enhance economic growth.

The ministry said inflationary pressures were easing out and the tendency was expected to prevail in coming months. During July-Oct FY2021, the main drivers of inflation (CPI) in Pakistan were international and domestic commodity prices, especially for food and oil products, the exchange rate and monetary and fiscal policies.

A major risk to this scenario of economic recovery is the upsurge of Covid-19 infections, all over the world and also, to a lesser degree, in Pakistan.

The November report said the recent upsurge in Covid-19 infections and hospitalisations had hit Pakistan’s most important export markets, with the exception of China. Fresh lockdown measures have been imposed in the UK and other European areas to flatten the curve. However, in the US, as no major restrictions had been imposed so far, infection seems still rising. As a result, the recent economic indicators show mixed global outlook.

The Weekly Economic Index (WEI) continued its upward trend up to the latest available data point in mid-November 2020. However, improvement in recent weeks seemed to decelerate due to the resurgence of coronavirus cases. Current value of this index indicated that still economic growth was far from its pre-crisis level.

The data released by the ministry with the report suggests remittances in the first four months of current fiscal year increased by 26.5pc, but exports, imports and foreign investment dropped by 10.3pc, 4pc and 62pc, respectively, when compared to same period last year.

Besides, trade deficit increased by 4pc to $6.7bn. The current account deficit of $1.4bn in the first four months of last year turned to $1.2bn surplus this year. The country’s total foreign exchange reserves increased by almost 34pc to $20.55bn as of November 20.

According to the ministry, Pakistan had taken timely measures to mitigate the negative impact of the pandemic. Thus, in the first quarter of FY2021, considerable recovery had been seen in domestic economic activity, but ignorance of people caused the resurgence of the Covid-19 infection putting downside risks to the outlook, particularly, if there are tighter restrictions on mobility.

Prospects for growth in agriculture, the report said, were encouraging on the basis of better production of sugarcane and rice. The government expects that the recently announced Rabi Package including wheat support price at Rs1,650 and discount of Rs1,000 per bag on some fertilizers would encourage major and minor crops growers. “It is expected that performance of agriculture will remain as per target or it may even surpass the target,” it said.

Industrial activity, measured by the large-scale manufacturing (LSM) index is the sector that is most exposed to external conditions. It said sufficient orders were available with the exporters for the coming months but delayed economic recovery in some of Pakistan’s main trading partners may exert downside risk.

The ministry said the fiscal performance in the first quarter was quite satisfactory but challenges persisted due to recent increase in number of coronavirus cases. The government’s continued focus on Covid-related expenditure, both for economic revival and social relief, could build pressure on expenditure side and increase public spending. The better revenue performance in improved economic activities in the first quarter may also be affected by containment measures and slower economic activities in services.