ISLAMABAD: Painting an uncertain economic outlook, the Ministry of Finance on Thursday warned that prevailing political unrest was causing governance problems and intensifying the market uncertainties already caused by low foreign exchange reserves and external pressures.

“Inflationary and external sector risks are building macroeconomic imbalances in the economy. Furthermore, the ongoing political unrest is increasing economic uncertainty, which is causing the rupee to depreciate and has an impact on the cost of production. All these factors are making the economic outlook uncertain”, said the Economic Adviser’s Wing (EAW) of the Ministry of Finance in its Monthly Economic Update and Outlook for July.

Read: Is the rupee too weak to recover?

It said the high international prices were still adversely affecting external positions even at the start of FY23. There was an intense need for the successful completion of the IMF 7th and 8th reviews of Pakistan’s Exte­nded Fund Facility (EFF). The government has taken all difficult decisions to make reviews successful, reaching a staff-level agreement for a $1.17bn loan tranche, the report said.

However, ongoing political unrest is not only creating governance problems but on the other hand, intensifying the uncertainties depicted by exchange rate depreciation which will, in turn, impact the cost of production. Halting investment decisions is further making the outlook blurry.

Read: The cost of political polarisation

The update said the year-on-year inflation remained in double digits since November 2021 and will continue in July and hover around the level observed in June due to the increase in international commodity prices, particularly of energy, and the depreciation of the rupee. CPI Inflation was recorded at 21.3pc in June as against 9.7pc in the same month last year.

In June, the surge in imports of goods owing to an increase in international commodity prices widened the trade deficit. Workers’ remittances were not enough to finance the trade deficit, and as a result, the current account deficit (CAD) widened to $17.4bn last fiscal year. However, it is expected that with the government’s policy measures, imports will fall, while the better performance of exports of goods and services and workers’ remittances will bring the CAD at a manageable level in the coming months.

The EAW said not only international commodity prices, especially oil and food prices, but the depreciation of the exchange rate influenced domestic inflation. It conceded that inflation mostly in the last two months was also coming from supply shocks whose impacts have overshadowed government efforts in maintaining prices.

The higher interest rate followed by monetary contraction was also adversely affecting the perception of the economic outlook. The recent cut in petroleum prices resulted in a decline in weekly SPI. But market expectations and supply side factors are contributing to inflation.

Published in Dawn, July 29th, 2022

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