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Govt Expects Inflationary Pressure to Calm Down ‘Gradually’

The government expects inflationary pressures to ease gradually as a result of flood-related damage that has disrupted the supply of essential items.

In its Monthly Economic Update & Outlook for January, the Ministry of Finance’s Economic Advisor’s Wing (EAW) forecasted CPI inflation on a year-on-year (YoY) basis for January 2023 to be in the range of 24-26 percent.

According to the report, rising onion and wheat prices are the primary factors influencing the overall price level. International commodity prices are declining year on year, and the impact will eventually be transmitted to domestic prices with some lags after adjusting for currency depreciation. While the government kept administered prices at their current levels to stabilize overall prices, a persistent shortfall of essential crops following the floods is preventing inflation from settling down.

In order to keep inflationary pressures at bay, the State Bank of Pakistan has implemented a contractionary monetary policy. However, supply-side factors explain a larger portion of the current price level volatility. Furthermore, recent political and economic uncertainties are both causing inflationary pressures expectations upward, the reported said.

Economic Activity

According to the report, economic activity has been on a downward trend since the start of the current fiscal year (FY23). It stated that the slowdown in global growth, particularly in major export markets, as well as central banks’ tight monetary policy stance (17 percent policy rate in January 2023) and low export growth, had a negative impact on Pakistan’s economic growth.

Current Account Deficit

The current account balance deteriorated slightly in December. The main reason for this was an increase in primary income payments and a decrease in remittances. These payments are expected to return to normal levels in January. Together with the expected improvement in the trade balance as a result of prudent government policies, the current account deficit may fall in January and stabilise during the second half of FY23, according to the report.

Tax Collection

According to the report, despite massive import compression. Despite an increase in tax collection of more than 17%, the Federal Board of Revenue (FBR) recorded a shortfall of Rs. 217 billion in the first half of the current fiscal year. Given the current global and domestic economic conditions, meeting the full-year target will be difficult.

Challenges

According to the report, Pakistan is currently facing challenges such as high inflation, low growth, and low levels of official foreign exchange reserves. Further month-on-month (MoM) increases in consumer prices may be offset by further mean-reverting international commodity prices and some exchange rate stability as the rate of depreciation slows.

Overall money supply expansion is consistent with a return to low and stable inflation. However, the outlook for M2 is largely dependent on fiscal accounts, which are under enormous strain due to high interest payments and rehabilitation spending.

 

Note: Given the recent massive depreciation of the Pakistani Rupee (PKR) against the US Dollar (USD), the inflation expectations appear unrealistic, suggesting that the report was compiled prior to last week’s record depreciation and increase in petroleum product prices.

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