MoF’s monthly outlook: High inflation could dampen Pakistan's growth prospects

The federal government is apprehensive that developments on the international front and persistent high domestic inflation may impact Pakistan's economic activities.

The Ministry of Finance, in its monthly 'Economic Update and Outlook' released Friday, said supply chain issues and surging international commodity prices are driving both international and domestic inflation.

“Under normal circumstances, these prices follow a cyclical pattern. That implies that normally, price spikes are followed by a cooling off period. But the current cycles of international food and oil prices are different,” read the report, because volatility in these markets is high compared to historical standards and because the increasing trend in prices may remain intact due to geopolitical tensions.

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It added that the surging inflation and the expected monetary policy reaction could hurt Pakistan's growth prospects.

“High inflation and the accompanying monetary policy reaction may temporarily dampen the cyclical position of Pakistan’s economy thereby reducing growth prospects in the short run. But in the long run, Pakistan’s productive capacity will determine the growth as well as employment prospects,” said the report.

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It added that productive capacity can be enhanced through a substantial upward shift in the propensity to invest and of the productivity of investment expenditures.

“Stimulating the propensity to invest implies that a larger share of the income that the country generates is used to finance gross fixed capital formation.”

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According to the report, structural policies need to be designed to attract more productive investments from foreign sources as well as from private and public domestic investors.

It highlighted that high international commodity prices not only keep inflation elevated, they are also a burden on Pakistan’s external account and hence on its foreign exchange reserves.

“Strengthening of Pakistan’s overall supply side through increasing its productive potential would allow it to produce more for exports and to discourage import. These prospects would relax the external constraint that has historically weighed on Pakistan’s economy and which has caused regular Balance of Payments crises and an accompanying stop-and-go profile in Pakistan’s economic growth path,” it said.