Exchange rate, POL prices: Inflation may stay at elevated level: MoF

ISLAMABAD: Inflation is expected to stay at an elevated level due to exchange rate depreciation and recent upward adjustment of administered prices of petrol and diesel as well as demand and supply gap of essential commodities while the country is currently confronted with a shortage in external liquidity.

Monthly Economic Update and Outlook for March 2023 released by the Finance Ministry on Friday noted that inflation is expected to stay at elevated level owing to market frictions caused by relative demand and supply gap of essential items, exchange rate depreciation and recent upward adjustment of administered prices of petrol and diesel.

Due to the lagged effect of floods, the production losses especially of major agriculture crops have not yet been fully recovered. Consequently, the shortage of essential items has emerged and persisted. Inflation may further jack up as a result of second round effect.

Inflation could break further records, clock in above 34%: report

Another potential reason of rising price level is the political and economic uncertainty. The economic distress resulting from delay of stabilisation program has exacerbated the economic uncertainty due to which inflationary expectations have remained strong.

Despite the SBP’s contractionary monetary policy the inflationary expectations are not settling down. Moreover, the bulk buying during the month of Ramadan may cause demand supply gap and result into prices of essential items to escalate.

However, the government is well cognizant of this and has already taken on board all provincial governments to ensure smooth supply of essential items. Inflation in March may remain in upper bound as observed in the month of February.

As witnessed last year, delay in rains and early heat waves are expected to adversely impact the wheat production.

According to Pakistan Met Office the country might witness different spells of heat-waves within upcoming months of April and May, 2023. In January, LSM activity came in marginally below expectations. Pakistan’s main export areas remains below its neutral level, some stabilization in its current cyclical condition seems to appear in recent months.

But current monetary restriction and fiscal consolidation, both required to bring external and internal balance may cause further short run pain to the domestic economy, which also translates into domestic industrial production below its neutral capacity level.

Furthermore, Pakistan is currently confronted with a shortage in external liquidity. Through demand management policies, government is trying to limit the current account deficit, which will not transfer further pressure on dwindling reserves.

Moreover, the government is firmly inclined to successfully complete the IMF’s EFF program, which includes necessary policy measures and will bring additional relief to the financial account of the balance of payments.

The fiscal deficit during first seven month of current fiscal year has been contained to 2.3 percent of GDP (Rs.1974 billion) against 2.8 percent of GDP (Rs 1898 billion) last year. The primary balance has posted a surplus of Rs 945 billion (1.1 percent of GDP) during Jul Jan fiscal year 2023 against the deficit of Rs21 0billion (-0.3 percent of GDP) last year.

The Federal Board of Revenue (FBR) revenue collection stood at Rs 4493 billion during July-January 2022-23 as compared to Rs 3802 billion showing an increase of 18.2 percent, non-tax revenue was recorded at Rs1046 billion compared to Rs 783 billion for July-January 2022-23 ( same period of last fiscal year.

The PSDP releases (including grants t0 provinces) stood at Rs 240 billion during the first seven months of the current fiscal year compared to Rs 362 billion for the same period a year before , showing a decline of 40.9 percent.

Copyright Business Recorder, 2023