ISLAMABAD: The Ministry of Finance (MoF) on Thursday identified the spread of Omicron variant, external pressures on account of higher imports and double digit inflation as emerging risks to an otherwise balanced growth trend.

“Though economic recovery is underway, the economy is also confronting the new Covid-19 wave, inflation and external sector pressure. The rising global inflation along with the significant increase in transportation cost and the subsequent supply chain disruption is expected to make international trade costly,” the MoF’s Economic Adviser’s Wing (EAW) said in its Monthly Economic Update & Outlook.

In its January 2022 Update, the EAW noted that “a number of risk factors remain present at the horizon”. The report said the first five months –July-November 2021 – fiscal deficit was recorded at 1.5 per cent (Rs951 billion) of GDP, up from 0.9pc of GDP at the end of first four months. The primary balance also posted a Rs36bn (0.1pc of GDP) deficit during July-November FY2022 against a surplus of Rs216bn (0.4pc of GDP) last year. The fiscal position could come under further pressure in the event of Omicron spread.

“A first risk factor concerns the surge of the Omicron variant of Covid-19,” said the MoF adding the experience in other countries showed that this variant was far more infectious than previous variants. “With the start of the fifth Covid wave driven by the Omicron variant, the expenditure side may come under further pressure”. However, the government will continue to follow a prudent expenditure management strategy while giving importance to the priority sectors so that the growth momentum may not be disrupted.

Finance ministry’s monthly update says risk factors remain present on the horizon

On the other hand, Omicron’s capacity to cause severe illness also looks to be impaired significantly. It is hoped that the SARS-CoV-2 virus that caused the Covid-19 pandemic may gradually converge to other known milder respiratory diseases that can be managed without causing too much damage to peoples’ personal health and to their economic welfare.

“A second risk remains the stress on the external balance”, the outlook noted. Although current account deficit remained high, the baseline scenario remains that the excess of imp­orts over exports will gradually ease in the coming months. This expec­ted tendency is enforced by government measures designed to stimulate exports and moderate import dem­and. The monetary policy decisions are also supportive in this respect.

“Thirdly, inflation is high and year-on-year (YoY) inflation is expected to remain in double digits in the coming month,” the report said. In this regard it should be noted that YoY increase in the CPI index is to a large extent a backward-looking indicator. It is not only determined by current price movements, but also by what happened 12 months ago, when international commodity prices were at the lower areas of their current price cycles, whereas now they are at the upper levels of these cycles.

Forward looking, what matters most is monitoring future month-on-month (MoM) price movements. Containing these price dynamics is the most relevant issue because they will determine further developments in the consumer’s cost of living.

It said the CPI inflation during July-December period of current fiscal year was recorded at 9.8pc against 8.6pc of same period last year. On MoM basis, CPI recorded a decline of 0.02pc in December 2021 against an increase of 3pc in November 2021. The overall spike in inflation, the report said, was due to increase in the prices of imported items like crude oil, wheat, sugar, pulses and edible oil.

Under the borrowing for budgetary support, the government has borrowed Rs299bn this year against Rs437bn of last year. The government also retired Rs28bn to SBP against the retirement of Rs586bn in last y ear. The government has borrowed Rs326bn from scheduled banks against the borrowing of Rs1.02trillion last year.

Published in Dawn, January 28th, 2022