The State Bank of Pakistan has warned that increases in electricity prices, induction of the reformed GST (RGST) and continued reliance of the government on borrowings from the SBP would only add to the uncertainty surrounding inflation expectations, and inflation for FY11 would be 14.5 percent.
According to SBP Monetary Policy Statement, the disruption in the supply chain of food items caused the month-on-month (MoM) food inflation to jump to 5.1 percent in August 2010, pushing the M-o-M CPI inflation to 2.5 percent, while it estimated that average CPI inflation for FY11 may fall between 13.5 and 14.5 percent. The SBP has also warned that increases in electricity prices, induction of the 'reformed GST' and continued reliance of the government on borrowings from the SBP would only add to the uncertainty surrounding inflation expectations.
In SBP's assessment, temporary spike in prices is largely due to floods as it was over and above the average M-o-M growth in food inflation (1.6 percent) and CPI inflation (1.1 percent) during Ramazan in the previous five years. It may take two to three months for food inflation to return to normal levels. Slowdown in private demand later in the year will at best have a moderating effect on CPI inflation as it is likely to be neutralised by an expected increase in government spending in general and on reconstruction in the flood affected areas in particular, it added.
"In the aftermath of the floods, bringing inflation down to single digits would require a supportive and sustained financial and fiscal effort over the next couple of years," the SBP said, adding that better management of financial resources, including more transparency and timely availability of fiscal figures, broadening of the tax base, controlling discretionary current expenditures and re-prioritising development expenditures would be imperative for fiscal consolidation. By the close of FY10, inflation was high, and the fiscal deficit had risen to 6.3 percent of GDP. Early assessments indicated that these pressures were unlikely to abate in FY11.