Pakistan Govt Predicts Increased Inflation, Economic Slowdown: Report

Cash-strapped Pakistan government has warned of more inflation coupled with a slowdown of the economy
Pakistans new  Prime Minister Shehbaz Sharif
Pakistans new Prime Minister Shehbaz Sharif

The cash-strapped Pakistan government has warned of more inflation coupled with a slowdown of the economy, blaming the delay in inking the crucial deal with the IMF for the worsening economic crisis, according to a media report on Saturday.

In its monthly outlook report issued on Friday, the Finance Ministry also said that political instability has started feeding the strong inflationary expectations, The Express Tribune newspaper reported.

Holding back its inflation forecast figure for the outgoing month, the Finance Ministry painted a gloomy outlook of the economy, saying that the Monthly Economic Indicator, a tool to predict the economic growth rate based on past and current indicators, has further slowed.

“Inflation in March may remain in the upper bound as observed in February when it was 31.5 per cent,” the ministry stated. Although it did not give a figure this time, the market expects inflation to shoot up to 36 per cent due to a host of negative measures, the report said.

A conservative internal assessment of the Finance Ministry suggested around 34 per cent inflation rate in March. The ministry said that a “potential reason for rising price level is political and economic uncertainty.”

The ministry also noted that the delay in finalising the USD 1.1 billion tranche of funding from the International Monetary Fund (IMF) programme was causing further economic distress.

“The economic distress resulting from delay of the stabilisation programme has exacerbated the economic uncertainty due to which inflationary expectations have remained strong,” the report said.

Pakistan has been struggling hard to revive the USD 6.5 billion derailed IMF bailout package that the Washington-based global lender approved in 2019. Although, its missteps, like the petrol subsidy and attempts to borrow directly from commercial banks, have further complicated the matters for the cash-starved country.

The Finance Ministry said that even the contractionary monetary policies of the State Bank of Pakistan (SBP) were not helping contain the inflation.

“Despite the SBP's contractionary monetary policy, the inflationary expectations are not settling down,” the ministry said, showing dissatisfaction with the central bank’s tight monetary policy.

The SBP increased the policy rate by 3 per cent to 20 per cent in the last Monetary Policy decision held this month.

The monthly outlook report stated that bulk buying during Ramzan may cause a demand-supply gap, resulting in an escalation of the prices of essential items.

Due to the lagged effect of last year's floods, production losses, especially of significant crops, have not yet been fully recovered. Consequently, the shortage of essential items has emerged and persisted.

As a result, “inflation is expected to stay at elevated levels 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”, the report added.

The Finance Ministry stated that the average Monthly Economic Indicator (MEI) during the first eight months of the current fiscal year indicates a further slowdown in domestic economic activities.

The slowdown seems to be driven by a lack of industrial dynamism, accelerating inflation, which erodes the purchasing power of consumers and investors and is also illustrated by negative growth in exports and imports.

The indicator was already in negative territory since the start of the fiscal year. The Finance Ministry’s latest assessment indicates that there may not be any growth during the current fiscal year if no improvement is witnessed in the remainder period.

According to the report, the fiscal deficit during the first seven months of the current fiscal year has been contained to 2.3 per cent of the GDP against 2.8 per cent last year. Total expenditures grew by 10 per cent, largely driven by the expenditures on markup payments which grew 73 per cent due to higher servicing on domestic and foreign debt resulting from higher interest rates.

On the other hand, non-mark-up expenditures were reduced by 26 per cent, owing to a significant decline in the subsidies and grants, the media report said.

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