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Finance Ministry Forecasts “Sustained High Inflation” in the Upcoming Months

by News Publishing
April 30, 2023
in Business, Main
Reading Time: 4 mins read
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Finance Ministry Forecasts "Sustained High Inflation" in the Upcoming Months
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Ministry of Finance Forecasts Continued Elevation of Headline Inflation in the Near Future, Raising Concerns for Public and Government

According to the latest monthly economic update report released by the Finance Ministry, consumer price index (CPI)-based inflation is projected to persist at approximately 36-38% for April.

The report highlights that the surge in food and energy prices, along with currency depreciation and increased administered prices, have been key factors contributing to the overall rise in prices. Although global commodity prices are showing signs of decline, they still remain high compared to pre-pandemic levels.

Moreover, the slow recovery from flood-induced damages has led to a shortage of essential crops, exacerbating inflationary pressures due to the inadequate domestic supply.

Despite the State Bank of Pakistan’s implementation of a contractionary monetary policy, inflation expectations have yet to subside. However, the federal government, in collaboration with provincial governments, is closely monitoring the demand-supply gap of essential items and taking necessary measures to mitigate inflationary pressures.

The report notes that Pakistan’s economy continues to face significant challenges, characterized by persistently high inflation and a slowdown in economic activities.

However, there are positive indications resulting from the government’s stabilization policies, as evidenced by the surplus in the current account of the balance of payment (BOP). This surplus is expected to help alleviate external financing constraints, promote exchange rate stability, and instill confidence in the economy. The Finance Ministry hopes that the successful completion of the IMF program will attract more capital inflows, further stabilize the exchange rate, and alleviate inflationary pressures.

Regarding the upcoming Kharif 2023 season, inputs such as seeds, agriculture credit, and fertilizers are expected to be satisfactory.

The Pakistan Meteorological Department (PMD) predicts slightly above-normal rainfall in the next three months (April-June 2023), particularly in the upper half of the country. Lower rainfall is anticipated in June, while temperatures are expected to remain slightly above normal in most parts of the country. The gradual increase in temperature will accelerate snowmelt in the northern areas. While the seasonal rainfall may provide sufficient water for crops in the main rain-fed areas, the lower parts of the country may experience slight deficiency during the Kharif season.

The report also highlights the vulnerability of the industrial sector, specifically the large-scale manufacturing (LSM) index, to external conditions. The cyclical pattern of industrial activity is closely correlated with the cyclical position of Pakistan’s major trading partners.

LSM activity has remained below its natural capacity level since the beginning of the fiscal year. The same observation applies to the cyclical position in Pakistan’s main export markets. The cyclical recession in the manufacturing sector has been further exacerbated by necessary policy measures aimed at addressing macroeconomic imbalances.

While recent months have shown LSM output still below its potential, there are signs of stabilization. Seasonally adjusted LSM activity indicates some bottoming-out in recent months, with an expected increase in March compared to February due to positive seasonal effects. However, the year-on-year LSM growth may still be marginally negative due to the high base effect.

In March, the trade deficit in goods and services decreased by 9.1% month-on-month and 54% year-on-year based on Balance of Payment (BoP) data. Notably, exports of goods and services increased by 9.5%, and imports of goods and services increased by 2.3% in March, with high export growth offsetting the impact of increased imports and containing the trade deficit.

In March 2023, remittances experienced a significant increase of 27% month-on-month, reaching $2.5 billion compared to $1.99 billion in February 2023. This boost can be attributed to improved conditions resulting from exchange rate adjustments, as well as the influence of Ramadan and Eid, which played a pivotal role in attracting higher remittance proceeds. These positive factors contributed to a surplus in the current account, amounting to $654 million in March. This is the highest level observed since November 2020.

Moving into April, it is anticipated that imports will increase to a higher extent compared to March, as the government has decided to relax pro-growth import restrictions in order to stimulate domestic economic activities. However, remittances are expected to remain at the same level as observed in March. Consequently, all these factors combined will help reduce the overall current account deficit.

Despite facing unprecedented challenges stemming from domestic and global economic situations, efforts for fiscal consolidation remain on track. The objective is not only to establish crucial fiscal buffers but also to restore macroeconomic stability.

The effective implementation of consolidation measures has led to a significant rise in revenues from both tax and non-tax collections, while overall spending growth has been contained through substantial reductions in non-markup expenditures.

Despite these improvements, risks to the financial sector persist. For instance, tax collection by the Federal Board of Revenue (FBR), although growing at a rate of 18%, has remained below the target set for the first nine months of the current fiscal year due to a slowdown in domestic economic activity and import compression.

On the expenditure side, despite efforts to reduce non-markup spending, higher policy rates at both the domestic and global levels have contributed to increased markup payments.

Under these circumstances, the government faces the challenging task of implementing effective revenue mobilization and adopting a cautious expenditure management strategy to conclude the current fiscal year with a significant decline in the fiscal deficit compared to the previous year.

Tags: Consumer Price Indexfinance ministryInflationlatest
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