Ministry of Finance warns inflation to remain high, could increase further

The Ministry of Finance (MoF) has warned inflation is expected to remain high, and may even increase further due to “market frictions caused by relative demand and supply gap of essential items, exchange rate depreciation and recent upward adjustment of administered prices of petrol and diesel”.

In its ‘Monthly Economic Update & Outlook’, the ministry said due to the lagged effect of floods, production losses especially of major agriculture crops has not yet been fully recovered.

“Consequently, the shortage of essential items has emerged and persisted. Inflation may further jack up as a result of second round effect”.

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The development comes as Pakistan remains engulfed in one of its worst economic crisis. The country’s consumer price index (CPI) jumped 31.5% in February year-on-year, the highest annual rate in nearly 50 years, as food, beverage and transportation prices surged more than 45%.

The Ministry noted that ongoing political and economic uncertainty is “another potential reason of rising price level”.

“The economic distress resulting from delay of stabilization program has exacerbated the economic uncertainty due to which inflationary expectations have remained strong,” it said.

The ministry admitted that despite State Bank of Pakistan’s (SBP) contractionary monetary policy the inflationary expectations are not settling down.

It added that bulk buying during Ramadan may cause demand-supply gap and result in prices of essential items to escalate.

“However, the government is well cognizant of this and have already taken on board all provincial governments to ensure smooth supply of essential items,” it said.

MoF expects inflation in March to remain in the upper bound as observed in the previous month February.

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On agriculture, the report said that delay in rains and early heat waves are expected to adversely impact wheat production this year.

On industry, the ministry acknowledged that the current monetary restriction and fiscal consolidation may cause further short-run pain to the domestic economy, which also translates into domestic industrial production below its neutral capacity level.

It also noted that year-on-year growth of Large Scale Manufacturing is expected to remain negative in February while month-on-month growth is expected to remain positive.