- Inflation may increase after pass-through of international oil prices to domestic energy products, says finance ministry's monthly 'Economic Update and Outlook' report
The government has expressed apprehensions regarding Pakistan's economy, saying that the country's economic growth is facing challenges due to wider macroeconomic imbalances, while warning that inflation could flare up further as energy prices remain high.
The Ministry of Finance, in its monthly 'Economic Update and Outlook' released on Wednesday, stated that the current account deficit which remained high during the first 3 quarters of the fiscal year, may decelerate by end of this fiscal year and onwards.
The ministry forewarned that the delayed pass-through of international oil prices into domestic energy products may increase inflation. “(However) inflationary pressure may ease once international commodity prices start decline and stabilize,” it said.
Rising oil prices has become a headache for the South Asian economy, which is facing dwindling foreign exchange reverses, while the country’s oil imports have jumped up to $20 billion in the first eleven months of the fiscal year.
Meanwhile, inflation continued to march upwards, as the Consumer Price Index (CPI)-based reading clocked in at 13.8% on a year-on-year basis in May 2022.
Moreover, going forward, Pakistan’s growth prospects are expected to remain satisfactory, said the monthly update.
The report further highlighted the number of potential risks, which may diverge it from optimal path.
“First, the cyclical position of Pakistan’s main trading partners is somewhat deteriorating. Their central banks are raising interest rates to counter inflation thus leading to possible recession in those countries.
“Second, the SBP may further raise domestic interest rates,” informed the report, adding that the demand management policy of SBP may not be very effective as the current waves of inflation are largely caused by supply constraints and increasing international prices, especially commodity prices.
It added that the ongoing rupee depreciation against the US dollar is also a source of concern as it makes the imported raw material more expensive.
“Third, the persistent rise in domestic consumer prices is eroding real incomes, limiting the spending power of consumers and investors.
Ministry of Finance said that sound policy responses may lay the basis for a sustainable long run growth trajectory.
“This should be accompanied by measures that aim to strengthen the growth of Pakistan’s potential output. These measures need to include the creation of a beneficial investment climate, confidence promotion and stimulus for promising economic initiatives with high growth potential.
“In the longer run, elevating the growth rate of potential output reinforces the supply side of the economy, accompanied by neutral demand management will bring the current account balance onto a long run sustainable path,” it added.