Inflation to remain on higher side in April, warns finance ministry

ISLAMABAD - The ministry of finance has noted that the domestic and international scenarios are changing which carry implications for the economic recovery.
“International developments and persistent high domestic inflation may impact domestic economic activities. Among the determining factors of current trends in both international and domestic inflation are supply chain issues and surging international commodity prices,” the ministry noted in its ‘Monthly Economic Update & Outlook April 2022’.
The ministry has warned that inflation would remain on the higher side in ongoing month of April. Inflation for the month of April may remain within a range of 11.5 to 12.5 percent. International commodity prices, especially oil and food prices are the main external contributors. Further, exchange rate fluctuations also affect domestic prices. The movements in broad money are also considered a useful indicator because it reflects the influences of monetary and fiscal policies on the domestic price index. Finally, market expectations regarding these inflationary developments are also contributing factors. Following recent geo-political tensions and especially the war in Ukraine, monthly international oil and food prices are accelerating again. These may sustain the next month on month increases in domestic consumer prices. The April inflation number may also be subject to an upward seasonal effect.
It is expected that fiscal deficit may increase further in the coming months. On the expenditures side, higher subsidies and grants are putting significant pressure on fiscal accounts. During Jul-Mar, FY2022, the fiscal deficit has been increased to 4.0 percent of GDP against 3.0 percent of GDP last year.
The higher temperature in March 2022 stressed wheat production, however, no adverse climate shock is expected in the coming months. Thus, it is expected that the overall agriculture sector’s performance will remain satisfactory.
With the further domestic and international relaxing of protective measures against the pandemic, Pakistan’s exports benefited from a largely depreciated Nominal Effective Exchange Rate. Domestic economic expansion, and the positive trend in exports, as well as the historically strong surge in international commodity prices, have also brought imports on a rising trend since mid-2020. The main challenge is to expand further the share of exports in domestic Gross Value-Added creation and to limit the further expansion of the share of imports to reduce trade balance. The monetary policy tightening as well as measures taken to limit unnecessary imports may bring correction to the external sector imbalances in the short to medium-term.
“In April 2022, it is expected that remittances may surge on account of Eid festive. However, geopolitical risks are still not over. Thus, imports of goods and services may continue to show a rising trend mainly due to the rise in international commodities prices. Taking these factors into account, as well as its other components, the current account deficit is expected to stay around $ 1 billion in the coming months”.
It further noted that high inflation and the accompanying monetary policy reaction may temporarily dampen the cyclical position of Pakistan’s economy thereby reducing growth prospects in the short run. But in the long-run, Pakistan’s productive capacity will determine the growth as well as employment prospects. This requires a substantial upward shift in the propensity to invest and of the productivity of investment expenditures.
Stimulating the propensity to invest implies that a larger share of the income that the country generates is used to finance Gross Fixed Capital Formation. Structural policies are to be further designed to attract more productive investments from foreign sources (Foreign Direct Investments) and from both private and public domestic investors. High international commodity prices not only keep inflation elevated, they are also a burden on Pakistan’s external account and hence on its foreign exchange reserves. Many other countries are facing the consequences of high and volatile commodity prices, especially oil and gas prices. Strengthening of Pakistan’s overall supply side through increasing its productive potential would allow it to produce more for exports and to discourage import. These prospects would relax the external constraint that has historically weighed on Pakistan’s economy and which has caused regular Balance of Payments crises and an accompanying stop-and-go profile in Pakistan’s economic growth path.

| Says fiscal deficit may increase further in coming months