The finance ministry has warned of an increase in inflation, driven by the second-round effects of previous policy decisions to raise energy and fuel prices, the central bank’s policy rate, and the rupee depreciation to secure IMF funding. The ministry predicts this inflation hike will coincide with an economic slowdown.
The government has expressed concern about the ongoing delay in finalizing a deal with the International Monetary Fund, citing increased economic distress in the country. According to the finance ministry’s economic adviser wing, political instability also contributes to strong inflationary expectations.
The Monthly Economic Indicator, a tool for predicting economic growth based on past and current indicators, shows a further economic slowdown. The finance ministry has not provided a specific inflation forecast for the outgoing month, but market expectations point to a possible 36% increase due to various negative factors.
Subsidy Costs and IMF Program Struggles
The report reveals a nearly Rs100 billion total cost for the Prime Minister’s free wheat flour subsidy program. Meanwhile, Pakistan faces challenges in reviving the derailed $6.5 billion IMF program due to factors such as petrol subsidies and direct attempts to borrow from commercial banks.
The finance ministry has expressed dissatisfaction with the central bank’s tight monetary policy, stating that it has not helped contain inflation. The central bank increased the policy rate by 3% to 20% in its last Monetary Policy decision this month.
Supply and Demand Imbalances Drive Inflation
The report suggests that bulk buying during Ramadan may cause a demand-supply gap, resulting in higher prices for essential items. Furthermore, production losses due to floods and the lagged effect on major crops have led to shortages of essential items.
To aid those affected by inflation, the prime minister has announced a Ramzan package, including free wheat flour, to the population. Several provincial governments have allocated funds for subsidies and targeted support to households in need.
Economic Outlook and Manufacturing Struggles
The finance ministry reports that the average Monthly Economic Indicator for the first eight months of the current fiscal year indicates a further slowdown in domestic economic activities. Large-scale manufacturing performance has also suffered, with negative year-on-year growth expected in February.
During the fiscal year’s first seven months, the deficit contained 2.3% of GDP. The finance ministry expects exports and imports to remain at current levels due to slow growth in major trading partners and contained domestic economic activities. Efforts to limit the current account deficit are underway through demand management policies, aiming to prevent further pressure on dwindling reserves.
