Outlook for inflation

The multilateral agencies, World Bank, and the IMF, have recently updated their projections of the rate of inflation in Pakistan in 2021-22 and 2022-23. These projections are shown in Table 1.

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Table 1
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Projected Rate of Inflation in Pakistan By International Agencies
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                                                                                (%)
                                              2021-22                       2022-23
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IMF
Average for Year                                 11.2                          10.5
End of Period                                    12.7                           8.2
World Bank
Average for Year                                 10.7                          n.a.
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Source: IMF, World Economic Outlook | World Bank, South Asia Economic Focus Report.
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The World Bank projection for 2021-22 is on the low side at 10.7 percent. Already, in the first eleven months, the average rate has reached 11.3 percent. Similarly, the average for the year is also understated by the IMF, with the 13.4 percent rate of inflation already in April 2022 and 13.8 percent in May 2022.

What is likely to be the rate of inflation in the months of 2022-23? This depends on the following factors:

(i) The rate of inflation in international commodity prices. There are clear indications that import prices will continue to rise, especially of oil, coal, palm oil and wheat. The price of crude oil has risen to over $125 per barrel. This will continue to put pressure on domestic prices.

(ii) The prices of petroleum products have been raised recently by Rs 60 per liter. More increase is required to fully eliminate the subsidy and for reintroduction of the sales tax and possibly the petroleum levy.

(iii) The other source of uncertainty relates to the movement of the rupee. If the 7th review of the IMF programme is not finalised, and reserves continue to decline significantly, then there could be a big downward movement of the rupee.

As highlighted above, the IMF expects the average rate of inflation to moderate to 10.5 percent from 11.2 percent in 2021-22 and for the inflation rate to be down to only 8.2 percent in June 2023.These are extremely optimistic projections.

The Macroeconomic Model of BNU is used for making projection of the rate of inflation in 2022-23. The estimated inflation rate equation has the following determining variables and their quantitative impact:

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       Determining Variable                                       Impact on Rate of Inflation
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1)     1 percentage point higher                                  0.706 percentage point
       GDP growth rate                                            reduction in rate of inflation
2)     1 percentage point higher                                  0.507 percentage point
       rate of expansion in money supply                          rise in rate of inflation
3)     1 percentage point higher rate of                          0.396 percentage point
       increase in import prices (in rupees)                      rise in the rate of inflation
4)     1 percentage point increase in administered                0.161 percentage point
       prices of electricity, gas, and petroleum products         rise in the rate of inflation
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Projection is made of the rate of inflation under two sets of assumption as follows:

i) The GDP growth rate is likely to come down sharply in 2022-23 due to the big jump in interest rates, the limited growth in the federal PSDP, measures to restrict imports and the impact on level of production in various sectors due to the quantum jump in input costs.

ii) Efforts will be made by the SBP to restrict the rate of monetary expansion in 2022-23. The rate of monetary expansion is likely to be somewhat lower at 13 to 15 percent.

iii) The projection of the increase in import prices in rupees includes the combined effect of rise in international commodity prices and depreciation of the exchange rate. The projected increase is 15 to 20 percent which is likely to be on the conservative side.

Two scenarios are presented in Table 2.

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Table 1
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Projected magnitude of variables affecting the rate of Inflation in 2022-23
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                                                                                                           (%)
                  GDP Growth         Rate of            Rate of                 Rate of              Projected
                     Rate           Expansion           Increase               Increase in                Rate
                                 in Money Supply    in Import Prices*      Administered Prices    of Inflation
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SCENARIO-I            4.0              13.0              15.0                    50                       17.7
SCENARIO-II           3.5              15.0              20.0                    60                       22.6
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*Including devaluation of rupee

Based on the above impact coefficients, the projected rate of inflation in 2022-23 is likely to be exceptionally high, ranging from 18 percent to 23 percent. The range is large because of greater uncertainty about developments in 2022-23. The larger rate will be the one of the highest rates of inflation ever in Pakistan.

The likely high double -digit rate of inflation in 2022-23 will require big relief measures. The federal government has insulated its employees by giving them a 15 percent increase in pay in 2022-23. The 2000 rupees cash transfer to 14 million households announced after the increase in petroleum prices will continue and the allocation for the BISP programme has been increased in the 2022-23 federal budget. The personal income tax exemption limit has been raised from Rs 600,000 to Rs 1,200,000, which will mostly benefit middle income salary earners.

However, despite these relief measures, 2022-23 is likely to be a very difficult year for bulk of the population of Pakistan.

Copyright Business Recorder, 2022