Finance ministry sees high inflation after record power tariff, oil price hike

ISLAMABAD-The Ministry of Finance has warned of inflation to increase in the months to come mainly due to the hike in oil and electricity prices in the country.
“The two massive fuel price hikes witnessed in the month of August 2023 and upward adjustment in energy tariffs, would strain the inflationary pressures in the coming months,” the ministry noted in its monthly report for August 2023. Nevertheless, the expected lagged impact of accumulated monetary tightening, fiscal consolidation efforts of the government and better growth outlook would help easing out inflationary pressures in the later half of FY2024.
It stated that the international commodity price outlook is promising and is expected to offset the negative impact of local currency depreciation in Pakistan and help lower the pressure on imported commodities’ prices. Moreover, the FAO Food Price Index, which tracks international prices of the most globally traded food commodities, stood at 123.9 points in July 2023, showing a decrease of 11.8 percent as compared to July 2022. Four of the FAO’s five food subindices - cereals, meat, dairy, and vegetable oils - recorded a decline of 14.5 percent, 5.1 percent, 20.6 percent, and 23.1 percent, respectively, which would be instrumental to ease out domestic prices.
The ministry noted that the country’s economy is still confronting both global and domestic challenges, as at global level a tight monetary policy stance will continue to address the problem of inflation. In FY2023, the external sector stabilised as the current account deficit contained to $2.4 billion against $17.5 billion in FY2022. On the other hand, the fiscal sector remained under tremendous pressure and the fiscal deficit reached 7.7 percent of GDP. Similarly, industrial activity was suppressed as LSM observed negative growth of 10.26 percent. Despite this, higher and inclusive growth targets of 3.5 percent for FY2024 with some facilitation measures have commenced some dividends in July 2023 and FY2024 started with some encouraging signs and expectations - MEI observed positive growth after Feb-2023.
The report projected that the current account will remain around the same level observed in July 2023. For the outlook, imports will gradually increase in next months, to increase in economic activities. However, exports are facing both global and domestic headwinds which may hinder growth in coming months. BoP data for the month of July-FY2024 shows that exports of goods and services continued to observe last year’s trend and declined by 3.2 and 1.4 percent, respectively, on YoY and MoM basis. However, imports have changed their behaviour after lifting the restriction, which increased by 29.8 percent on a MoM basis in the month of July-FY2024. This has resulted in a trade deficit of goods and services, widened from $1.18 billion in June 2023 to $2.4 billion in July 2023. Similarly, remittances decreased by 19.3 and 7.3 percent on YoY and MoM basis, respectively. As a result, the current account turns to a deficit of $809 million against a surplus of $504 million in June 2023.
Going forward, in FY2024, the budget strategy 2023-24 prioritised fiscal consolidation efforts to meet the existing challenges on both revenue and expenditure sides. The objective is to achieve a primary surplus of 0.4 percent and reduce the fiscal deficit to 6.5 percent of GDP in FY2024. To achieve these targets the priorities are geared towards effective resource mobilisation through various tax measures and expenditure control by adopting austerity measures. While pursuing fiscal consolidation, the government is committed to safeguarding vulnerable segments of society by expanding social safety nets and ensuring targeted subsidies. These measures would be supportive in mitigating the effect of policy changes for lower-income individuals. The extension of Kissan Package-2022 will certainly have a positive impact on the agriculture sector which in turn raises the livelihood of the farmers and it will contribute in achieving the targeted growth for FY2024.
“In Pakistan, the real sector, agriculture and manufacturing experienced mixed trends. In the agriculture sector, cotton arrivals increased due to the improved seed quality. It is expected that the recent year’s target of 12.77 million bales will be achieved with the use of improved quality of seed in both Sindh and Punjab. Large Scale Manufacturing (LSM) has faced challenges due to supply chain disruptions and policy stances. Key sectors such as automobiles, petroleum, and cement have witnessed varying levels of growth and decline,” the report noted. Pakistan’s fiscal year 2023 witnessed an increase in total expenditures, driven by higher current spending. Development expenditure rose due to increased federal Public Sector Development Programme (PSDP). Revenues increased due to higher tax collection, with growth in both domestic taxes and customs duty.