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Finance ministry sees improved economic indicators despite sustained inflation

Finance ministry sees improved economic indicators despite sustained inflation


Admits negative effects of high interest rates

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ISLAMABAD (Web Desk) – The Ministry Finance says the interest rates were maintained at 22 per cent, owing to the significant performance of high-frequency indicators and improved inflation outlook – although the consumer price index (CPI) negates the claim as an overwhelming majority in Pakistan are facing an unprecedented cost-of-living crisis.

Overall, positive economic signals and recovery indicators are steering the improvement in the GDP outlook for the fiscal year, says the ministry in its Monthly Economic Update and Outlook for November while relying on the data from October.

“The government expects remittances to recover in Oct 2023, as spreads between the interbank and open market have reduced below 1pc. However, global inflation has impacted the disposable incomes of overseas workers, resulting slowdown across the board, particularly Bangladesh, India, and the Philippines.”

About the effects of high interest rates and payments, it says, “Despite better fiscal accounts during the first quarter of the current fiscal year, higher mark-up payments may put significant pressure on the expenditure side.”

It also mentions the negative impacts of high interest rates globally. “The impact of tighter monetary policy is becoming increasingly visible, business and consumer confidence have turned down, and the rebound in China has faded. However, in the near term, government's fiscal expansion should help the country achieve its 5.0pc growth target for 2023.”

“Global GDP growth is projected to remain sub-par in 2023 and 2024, at 3.0pc and 2.7pc respectively, held back by the macroeconomic policy tightening needed to rein in inflation.”

It says that the CPI inflation was recorded at 26.9pc on year-on-year basis in October 2023 as compared to 26.6pc in October 2022 whereas it increased to 31.4pc in the previous month.

The ministry also admits the higher inflation during the first months of the current fiscal year as the CPI stood at 28.5pc against 25.5pc in the same period last year. On a month-on-month month, it increased to 1.1pc in October 2023 compared to an increase of 2.0pc in the previous month.

Major drivers contributing to this trend, the report says, are: alcoholic beverages and tobacco (84.6pc); furnishing and household equipment maintenance (37.1pc); non-perishable food items (33.0pc); transport (31.3pc); housing, water, electricity, gas and fuel (20.5pc); health (25.2pc), clothing and footwear (20.6pc) and perishable food items (1.9pc).

Talking about the external factors, the report reads, “High-frequency activity indicators across the largest economies present a mixed picture, but on balance signal a loss of momentum in the second half of 2023. Labour markets generally remain tight, with unemployment rates at or near multi-year low level.”

“During the second half of 2023, declines in headline inflation are now helping to improve household real disposable incomes, but real wage losses over the past two years and tighter financial conditions continue to restrain consumer spending in most advanced economies, with the US a notable exception. Industrial production has continued to stagnate in many economies, despite some signs of an upturn in tech-related activity.”