The Ministry regrets paying surcharges with high interest rates

• Inflation will ease to 26.5-27.5% in February 2024.
• It remained around 27.5-28.5% in January 2024.
• Spending is expected to remain under pressure.

ISLAMABAD: Raising a red flag for the massive increase in expenditure, the finance ministry on Wednesday admitted that the major challenge was higher surcharge payments due to the increased policy rate, which led to a sharp increase in current expenditure.

The second challenge, admitted by the government, was rising inflationary pressures, saying inflation is expected to remain around 27.5-28.5% in January 2024 and ease further to 26.5-27.5% in February 2024.

“The major challenge is higher incremental payments due to the high rate of policy leading to a sharp increase in current expenditure. To address this challenge, the government is putting all its efforts in controlling non-incremental expenditure through austerity measures, which are proving from the increase in the primary surplus during July-December 2024.

“However, due to rising surcharges in response to high policy rates, spending is expected to remain under pressure during the current financial year,” the finance ministry admitted in its monthly report released on Wednesday.

On inflation, the report says that increased prices of perishables and vegetables, combined with increased utility costs (electricity and natural gas), contributed to inflationary pressure.

A surge in onion export orders following India’s ban has stretched local supply and boosted domestic prices. Certain commodities, such as tomatoes, saw price increases due to supply disruptions caused by severe weather, widening the demand-supply gap. Similarly, chicken prices rose due to reduced supply, particularly from controlled sheds that faced higher input costs.

However, the government took steps to reduce onion exports by raising the minimum export price and also lifted the ban on soybean imports, which would ease the supply situation of perishables and chicken. In January 2024, there is a slight moderation in the outlook for inflation compared to the previous month.

Although, however, challenges remain in the form of supply chain disruptions and increased utility prices, lower fuel costs offer a promising counterweight, potentially mitigating the overall impact on consumers and the manufacturing sectors.

The agricultural sector’s performance is up compared to last year as crops are performing well. Wheat which is the main crop of Rabi 2023-24 is expected to perform well as the crop exceeded the target. On the other hand, unprecedented weather shocks may affect productivity as January 2024 is the coldest and most important month for the early growth of Rabi crops in most agricultural plains of the country. Farmers can take precautionary measures to protect their crops, vegetables, orchids and livestock from the damaging effects of the expected extremely cold weather.

The LSM cycle typically follows cyclical movements in major trading partners, but since it focuses on major industrial sectors rather than overall GDP, it is somewhat more volatile than the cyclical component of GDP in Pakistan’s major export markets. Economic conditions in Pakistan’s main export destinations have shown signs of improvement as evidenced by the overall CLI in these markets. It has improved and reached its potential level, signaling a favorable external environment that supports Pakistan’s industrial performance.

Domestically, despite persistent challenges, the industrial sector is showing signs of recovery and government measures to stimulate growth, particularly in SMEs, are providing impetus. This is evidenced by 3.63% MM growth in LSM in November 2023 and 1.59% annual growth.

The upward trend was seen due to revival in domestic economic activities and better export demand in Pakistan’s main export markets. On the other hand, imports have been restrained by 6.1% and 0.1%, on a monthly and annual basis, respectively. Another contributor to the current account surplus is workers’ remittances – recorded growth of 5.4% and 13.4% YoY and YoY, respectively. The recovery of domestic economic activities combined with the stable exchange rate contribute to the stability of the external sector. It is expected that the continuation of these developments and policies to increase exports and remittances will further translate into an improvement in the trade balance and the current account during the second half of 2024.

As of December 2023, the balance of payments (BoP) data shows the dynamics of external sector stability as evident through the current account turning into a surplus of $397 million, the surplus observed after June 2023. This development is mainly due to the subdued trade deficit – which decreased by 25.5% and 23.5% on a monthly and annual basis.

On the fiscal side, revenue performance is encouraging, however, there is significant pressure on spending attributable to higher top-up payments. Nevertheless, the government is taking measures to manage non-incremental expenditure, as evidenced by the continued improvement in the primary surplus. Pakistan recently received a tranche equivalent to US$705.6 million, following the successful completion of the first assessment by the IMF’s Executive Board under the Standby Arrangements (SBA) – which provides market confidence and exchange rate stability.

On the outlook, economic activities are expected to strengthen further in the second half of 2024 — contingent on continued sound and prudent economic policies geared towards achieving the growth target for the current fiscal year, the report concluded.

Originally published on The news