May 01, 2022 (MLN): Pakistan and most parts of the world have already been grappling with soaring inflation for months driven by rising demand, partly due to pandemic aid that ran into supply chain disruptions, higher commodities prices, and external imbalances while imposing a heavy burden on a marginalized segment of the society.
Powered by soaring prices of essential food items, yearly inflation measured by the Consumer Price Index (CPI) touched a two-year high of 13.37% in April 2022 from 12.7% YoY last month and 11.7% in April 2021, according to the latest inflation figures issued by the Pakistan Bureau of Statistics (PBS).
Accordingly, headline inflation during 10MFY22 has risen to 11.04% YoY. Remember that the State Bank of Pakistan has revised its inflation forecast upward to slightly above 11% for FY22 in the wake of political unrest, widening trade deficit, PKR depreciation, and depleting foreign exchange reserves.
On a month-on-month basis, inflation soared by 1.61% as compared to 0.79% MoM in March 2022, with the major impetus to the uptick in monthly prices coming from Food, Alcoholic Bev. & Tobacco and Clothing and Footwear indices.
Recent data from the PBS confirmed that, in April, the Ramadan effect contributed to increased demand for food as food inflation went up by 3.71% MoM, mainly due to a surge in prices of vegetables and fresh fruits as the perishable food items rose by 20.4% MoM while the seeping in of the rise in international palm oil prices has also started to become more visible in broad inflation’s food basket.
Moreover, the hike in prices of cigarettes during the outgoing month was observed in the Alcoholic beverage index which jumped by 3.08% MoM after a considerably long time.
While, Ramadan and Eid festivities impacted the clothing and footwear index, up 2.12% MoM, mainly due to the rise in prices of garments and tailoring that come into effect every year.
On the other hand, some respite came from the housing index which witnessed a decrease of 0.67% MoM mainly due to a reduction in the electricity charges on account of subsidy on electricity tariffs. CPI outturn for April would have been higher than the latest reading if the relief package had not been announced in the form of subsidies on petroleum and electricity.
Region-wise, Urban CPI witnessed an increase of 1.6% MoM and 12.2% YoY in April while Rural CPI went up by 1.6% MoM and 15.1% YoY during the said month.
The cash-strapped country is in dire need of external support and resuming the International Fund Monetary (IMF) program will bring much clarity to Pakistan's macros, bringing gradual stabilization to the exchange rate.
This could potentially shave off inflationary pressures but at a lag, a research note by AKD Securities said.
However, the completion of the 7th IMF review is conditioned on abolishing subsidies announced in Relief Package by the previous government in order to protect the masses from rising inflationary pressure from oil prices. This unwinding subsidies will likely induce cost-push inflation in the coming months.
“While this could either be phased out in a piecemeal fashion or with a one-off blow, we believe that this unpopular move will be necessitated in an attempt to obtain external funding from IMF and other bilateral lenders”, Wajid Rizvi, head of strategy and economy at JS Global said.
To note, the government on Saturday had decided to keep the petrol prices unchanged for the next fortnightly. According to the statement issued by Finance Division, Prime Minister Shehbaz Sharif rejected the proposal of OGRA for an increase in the price of petroleum products and directed to maintain the prices at the current level so as not to burden the consumers with a hike in the prices.
Notably, the inflationary expectations have started to rise where the secondary yields have moved upwards, also evident in the recent T-bill auction. Sentiments of another monetary adjustment of up to 200bp hike have emerged, more specifically evident from the rise of c.200bp in 6M and 12M yields since the last monetary policy announcement on April 07, 2022. This makes a case for another monetary adjustment of 100 basis points, he added.
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