The Monetary Policy Committee of State Bank of Pakistan (SBP), referring to fiscal sector, noted that despite the budgeted consolidation for fiscal year 2022-23, the fiscal outcomes deteriorated in the first quarter relative to the same period last year.
The fiscal deficit increased from 0.7 to 1 percent of GDP, with the primary surplus declining from 0.3 to 0.2 percent of GDP. This deterioration was largely due to a decline in non-tax revenues and higher interest payments.
At the same time, the growth in Federal Board of Revenue tax revenues was more than halved to 16.6 percent during the first four months of financial year 2022-23.
In response to the floods, the government has implemented a number of relief measures for the agriculture sector, including mark-up subsidies for farmers and the provision of subsidized inputs.
The floods could make it challenging to achieve the aggressive fiscal consolidation budgeted for this year, but it is important to minimize slippages by meeting additional spending needs largely through expenditure re-allocation and foreign grants, while limiting transfers only to the most vulnerable.
Maintaining fiscal discipline is needed to complement monetary tightening, which would together help prevent an entrenchment of inflation and lower external vulnerabilities.
In line with the slowdown in economic activity, private sector credit continued to moderate, increasing only by Rs 86.2 billion during the first quarter compared to Rs 226.4 billion during the same period last year.
This deceleration was mainly due to a significant decline in working capital loans to wholesale and retail trade services as well as to the textile sector in the wake of lower domestic cotton output, and a slowdown in consumer finance.
Headline inflation rose by almost 3.5 percentage points in October to 26.6 percent year-on-year , driven by a normalization of fuel cost adjustments in electricity tariffs and rising prices of food items.
Energy and food prices rose by 35.2 and 35.7 percent every year, respectively. Meanwhile, core inflation increased further to 18.2 and 14.9 percent year-on-year in rural and urban areas respectively, as rising food and energy inflation seeped into broader prices, wages and inflation expectations.
The momentum of inflation also picked up sharply, rising by 4.7 percent month-on-month. As a result of these developments, inflation projections for financial year 2022-23 have been revised upwards.
While inflation is likely to be more persistent than previously anticipated, it is still expected to fall toward the upper range of the 5-7 percent medium-term target by the end of fiscal year supported by prudent macroeconomic policies, orderly Rupee movement, normalizing global commodity prices and beneficial base effects.
The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth.