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No End in Sight: Inflation Continues to Plague Pakistan’s Economy

Inflation likely to hover around 13.5-14.5% in May 2024: Ministry
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March 01, 2023 (MLN): The economy is in the grips of a deadly beast – inflation – that’s running amok, wreaking havoc on the purchasing power of citizens across all income brackets. Despite the best efforts of economic managers to unlock the IMF, it seems like a Herculean task to tame this insidious monster as it will likely increase by 30.39% YoY in February 2023, compared to 27.6% YoY in the last month and 12.24% YoY in February 2022.

This would bring 8MFY23 average inflation to 26% as against 10.49%in the corresponding period last year.

This estimation is largely in line with the expected inflation by the Monthly Economic Update & Outlook by the Ministry of Finance which said, “It is expected that inflation will remain around 28% to 30% in coming months.”

CPI Projections for February 2023 YoY MoM
Arif Habib Limited 30.5 3.52
Ismail Iqbal Securities  29.6 2.8
Taurus Securities 30.5 3.5
Adam Securities 31 3.9
Abbasi and Company 30.7 3.7
Insight Securities 30.5 3.5
Intermarket Securities  30.4 3.3
AKD Securities 30 3.1
Next Capital 30.3 3.4
Average 30.39 3.41
Range 29.6-30.7 2.8-3.9
8MFY23 26  

 

The key reasons are the uncertain political and economic environment, the pass-through of currency depreciation, the recent rise in energy prices, and the increase in administered prices.

Although, SBP has been enacting contractionary monetary policy, but the inflationary expectation would take some time to settle. The federal government, in liaison with provincial governments, is closely monitoring the demand-supply gap of essential items and taking necessary measures to stabilize their prices.

It is hoped that the resumption of the economic stabilization program will help achieve economic stability leading to exchange rate stabilization and providing an opportunity to reap the benefit of falling international commodity prices, the report noted.

This will also help contain cost-push inflation and provide a cushion to the government to pass through the lower commodity prices to domestic consumers.

The month-on-month increase in inflation will mainly be attributed to a surge in the food index, transportation costs, and housing prices. The food index is predicted to increase by 3.9% in January 2023, based on data from the Pakistan Bureau of Statistics’ Sensitive Price Index, a report by Arif Habib said.

The rise in prices of commodities such as rice, chicken, ghee, fruits, vegetables, and pulses is likely to contribute to this increase. Housing prices are expected to rise by 2.0% due to an increase in LNG prices and gas charges, while the transportation index is predicted to experience a significant jump of 16.9% due to higher domestic petroleum product prices.

The situation is worsening by the day, with the common man feeling the pinch more and more. Prices are skyrocketing, and wallets are feeling the squeeze, leaving people high and dry. It’s as if inflation is a Trojan horse, surreptitiously breaching the defenses and raiding the wealth without a sound.

The Alcoholic Beverage and Tobacco basket is also expected to contribute to inflation during the month, as the price of cigarettes has significantly increased by an average of 53% due to additional taxes introduced in the Finance Supplementary Bill 2023.

The partial impact of these new taxes will be noticeable in February and fully reflected in March 2023.

Outlook:

It is anticipated that inflation will remain elevated throughout the rest of FY23. The pressure on inflation is expected to arise from several factors, including potential tariff hikes, recent tax increases, a weaker currency relative to the US dollar, and rising food prices.

In response to the high levels of CPI, the central bank has raised the benchmark policy rate to 17% during its January 2023 policy meeting wherein it also emphasized the importance of anchoring inflation, as the long-term costs of allowing it to persist outweigh the immediate costs of lowering it.

In a recent development, the forthcoming meeting of the Monetary Policy Committee (MPC) has been preponed to March 02, 2023, from its previously scheduled date of March 16, 2023.

The central bank’s announcement has been well-received by the majority of individuals who participated in a recent poll conducted by Mettis Link News. The poll suggested that the policy rate might be increased by 200 basis points to 19%.

The rescheduling of the MPC meeting indicated that the central bank is taking necessary measures to stabilize the country’s economy, which has been affected by high inflation and an unstable exchange rate.

The upcoming meeting is expected to provide more clarity on the central bank’s monetary policy stance and its efforts to stabilize the country’s economy.

Copyright Mettis Link News

Posted on: 2023-03-01T10:19:23+05:00