Inflationary pressure expected to calm down gradually: Finance Division

The Finance Division said on Tuesday that inflationary pressure in Pakistan is expected to calm down gradually following the flood-led damages that disrupted the supply of essential items.

In the Monthly Economic Update & Outlook January 2023, it said rising prices of onions and wheat are key factors responsible for affecting the general price level.

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It also predicted that consumer price index (CPI) based inflation in the range of 24-26% in January 2023 on a year-on-year basis.

“International commodity prices are showing a downward trend on a year-on-year basis and its impact will ultimately be transmitted into domestic prices with some lags after adjusting the currency devaluation.”

It is pertinent to mention that rupee witnessed a sharp depreciation over the past few trading sessions.

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The Finance Division added that “while the government kept the administered prices at their current level to stabilise the overall prices, the post floods persistent shortfall of essential crops is preventing inflation to settle down.”

It added that the State Bank of Pakistan (SBP) was also enacting a contractionary monetary policy to contain inflationary pressure. However, a larger portion of volatility in the current price level is explained by supply-side factors. Further, the recent political and economic uncertainties both are causing inflationary expectations upward.

Economic growth

According to the document, economic activity in Pakistan was following a lower growth path since the start of the current fiscal year.

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“This is also reflected by the negative growth of several high frequency variables such as cement dispatches, oil sales, industrial production. Furthermore, the slowdown in global growth especially in main export markets along with the tight monetary policy stance by central banks (17% policy rate in January 2023) and low export growth also affected economic growth in Pakistan negatively.”

It added that geopolitical tension, tightening financial conditions and rising inflation have all had a considerable negative influence on global growth expectations, creating severe challenges for the global economic environment and Pakistan is no exception.

“The government of Pakistan has adopted tight fiscal and monetary policies to combat the economic problems brought on by both internal and external forces,” the document stated.

Currently, the government is facing the difficult task of supporting vulnerable segments of society and meeting other public spending needs, in particular, rising interest servicing. However, due to prudent spending management and effective domestic resource mobilisation, the fiscal deficit was not only confined to the same level of 1.4% of GDP as last year but the primary balance surplus was also maintained during the first five months.

“Pakistan is currently confronted with the challenges like high inflation, low growth, and low levels of official foreign exchange reserves. Further month-on-month increases in consumer prices may be countered by a further mean reverting international commodity prices and some exchange rate stability due to decreased pace of depreciation.”

It added that overall money supply growth remains compatible with a return to low and stable inflation.

The outlook of M2 is broadly dependent on fiscal accounts which are under immense pressure on account of heavy interest payments and rehabilitation spending, the reported highlighted.

Nonetheless, the first five months of the current fiscal year have ended with some developments; containing fiscal deficit and surplus in primary balance due to effective fiscal management.

“Fiscal consolidation is key to saving official reserves and exchange rate stability. This may temporarily be costly in terms of growth prospects in the short term, but long-run prosperity and growth can only be achieved by augmenting the country’s long-term equilibrium growth path by expanding production capacities and productivity. This is a shared responsibility of both the private and public sectors.”