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Pakistan

Inflation to maintain declining trend in December: Finance Division

  • In its Monthly Economic Update & Outlook, govt expects CPI-based inflation to remain in the range of 21-23%
Published December 30, 2022

The Ministry of Finance said on Friday that the consumer price index (CPI)-based inflation will maintain its declining tendency in the month of December as “declining international commodity prices are expected to offset the inflation spikes that emerged due to domestic supply shocks”.

In its Monthly Economic Update & Outlook December 2022, the Finance Ministry said that the government’s recent decision to provide relief to the masses by slashing the prices of petroleum products is expected to translate into lower cost of food and non-food for general public.

"Inflationary pressure has started easing out as the month-on-month CPI inflation declined from massive high of 4.7% in October 2022 to 0.8% in November," it said in the report, adding that CPI inflation will remain in the range of 21-23% in December.

“The same trend is witnessed in SPI which decelerated for three consecutive weeks in December that would also be transmitted into CPI inflation of the current month.”

“The SBP has announced the increase of 100 bps in policy rate [in November 2022] in order to curtail inflationary expectation,” the report added.

It is pertinent to mention that CPI based inflation clocked in at 23.8% in November 2022 compared to 26.6% in October 2022.

Agriculture

The report painted a gloomy picture for the agriculture sector and pointed out that standing water due to recent floods may create problem in achieving the assigned wheat sowing target, however, the "federal and provincial governments are working hard and committed to enhance wheat productivity".

“In addition to timely increase in Minimum Support Price (MSP), the government has taken measures/initiatives like awareness campaigns, extension services, subsidised and quality provision of inputs (seed and fertilizers) etc, are focused to enhance wheat productivity.”

Industrial sector

As per the report, the industrial activity is most exposed to external conditions. In October 2022, the Large Scale Manufacturing (LSM) output came in somewhat lower than expected on the basis of a baseline scenario.

“In fact, the underlying trend in LSM is still positive, but, by historical standards, its cyclical position is significantly negative. This development can be the result of several factors. Firstly, the weighted average cyclical output gap in Pakistan's main trading partners remains in negative territory and continues to widen gradually, which implies reduction of global demand.”

Secondly, the impact of floods-induced destruction of agricultural output may start finding its way into the industrial sectors. Thirdly, Pakistan's official reserves are at relatively low levels, necessitating restrictive monetary policy and other measures to limit imports.

The report anticipated that pressure on LSM is likely to sustain in November if the negative shocks are continuing to prevail and outpace the LSM output which may gain some momentum as sugarcane crushing starts in November.

Economy

Giving a picture of overall economy, the report said that the average Monthly Economic Indicator (MEI) during the first five months of the current fiscal year points to positive but slow year-on-year economic growth.

“This is illustrated by the CPI inflation which remains elevated and weighs on real incomes, the further deteriorating cyclical position in Pakistan's main trading areas, declining growth of imports and negative output gap in LSM output.”

Also, other monthly indicators seem to confirm this development such as cement sales, automobile production and sale and oil sale, the report highlighted.

Most of the high frequency indicators have been showing the signs of lower growth since the start of the current fiscal year as the economic situation is faced with severe headwinds both at global and domestic ends.

“These are reflected in the MEI which continues to remain on a lower path of economic expansion. However, the government is taking all possible measures to counter the downside risks and supporting the incomes of the most needed as well as crucial sectors of the economy. As a result, contraction or recession as of yet been avoided.”

“As in many other countries, Pakistan's economic activity remains currently below potential, implying a negative output gap. At the same time, again as in many other countries, inflation remains substantially above targets.”

Furthermore, as is also the case in several other emerging economies, the global energy crises, which has pushed up global commodity prices, also puts downward pressure on international official reserves, the report underlined.

“During first five months of FY2023, Pakistan's economy showed signs of resilience to domestic and global challenges. Despite facing inflationary pressures, trade and current account deficits are continuously showing improvement, which is a sigh of relief for financing challenges.”

As per the report, fiscal consolidation is the top-most priority to achieve targeted fiscal deficit despite government is facing the unprecedented challenge of providing relief to people in flood-hit areas.

The Finance Ministry predicted economic growth was likely to remain below the budgeted target in fiscal year 2022-23 due to devastation created by floods.

Recommendations

The combination of low growth, high inflation and low levels of official reserves are particularly challenging for policy makers, the report said.

“In the short run, demand management policies by Pakistan's central bank and government are designed to fight inflation and protect official reserves and inclusive growth,” the report highlighted.

“In the long run, the government aims to stimulate the supply side to elevate the long run potential growth rate of the economy.”

The Finance Ministry held the view that increasing the long run growth trends of output, per capita real incomes and employment can only be achieved by stimulating investments in new production capacities and improving overall productivity.

Comments

Comments are closed.

Asif Dec 30, 2022 11:39pm
Here in karachi on daily basis price aata (flour) is increasing now selling at Rs 130 to 140 per kg from 120 in this month only! All the rice rates have increased by more than 20% in this month only?? I don’t understand where CPI index is declining??
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Asif Dec 30, 2022 11:44pm
In karachi the aata (flour) is now selling at Rs 130/140 per kg which was increased to Rs 120 in this same month! All the rice rates have also increased by 20% in this month only! I don’t understand does the authorities ever visited to markets before submitting Consumer Price Index repots!
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wanker Dec 31, 2022 12:33am
Further rupee depreciation will fuel inflation in the near future.
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