Finance ministry expects 14.5-15.5 percent inflation in June

ISLAMABAD - The ministry of finance has projected that inflation rate would further accelerate within range of 14.5 -15.5 per cent in current month (June) due to both external and internal factors.

“The government has withdrawn subsidies on fuel and energy products to control the mounting twin (budget and current account) deficit. As a result, sharp increase in prices of all oil products is witnessed. Further, the recent rise in international commodity prices especially energy and food, will also be translated into domestic prices,” the ministry of finance noted in its monthly ‘Economic Update & Outlook June 2022’.

Inflation in Pakistan is driven by both external and internal factors. International commodity prices, especially oil and food prices are the main external drivers. Furthermore, domestic supply chain and market expectations also play an important role to determine inflation. Inflation has been rising since September 2021. This acceleration is expected to continue in June 2022. In this scenario, annual inflation is expected to accelerate in June and may remain within range of 14.5 -15.5 percent. It added that the government will continue to alleviate the burden of the poorest segment of the society through various programs. According to the ministry, despite achieving a real GDP growth of 5.97 percent in FY2022, the underlying macroeconomic imbalances and mounting international risks are depicting challenging outlook especially pertaining to external sector. The input situation for Kharif 2022 is satisfactory and it is expected that the agriculture sector will continue to augur well on account of continued government support. The ministry of finance has estimated current account deficit at one billion dollars in June. In June 2022, exports are generally affected by a negative seasonality, but it is expected that the downturn will be to a lesser degree compared to May 2022. Therefore, exports are expected to perform somewhat better in June 2022. On the basis of the continued declining trend in imports on account of measures taken by the government, it is expected that improvement will be observed in the trade balance in June 2022 compared to the one observed in May 2022. The remittances fell considerably in May 2022 mainly driven by its seasonal profile. This together with the deterioration of the trade balance widened the current account deficit significantly. However, in June 2022, remittances are expected to rebound. Together with the expected relative stability of the trade balance, a contraction in the current account deficit is expected, which may settle at around $1 billion.

According to the Economic Outlook, in fiscal side, measures to offset the impact of higher international commodity and oil prices due to the Russia-Ukraine conflict took a significant toll on revenue and expenditures. Consequently, the risk of fiscal slippages during the current fiscal year has increased. On the revenue side, FBR tax collection has maintained its growth momentum by posting a 28.4 percent increase during Jul-May FY2022. However, growth momentum has been realized largely on the back of import-related taxes due to a sharp rise in import volumes. The government has announced measures to restrict imports in an effort to relieve external account pressures. With these measures in place, meeting the FBR tax collection target for FY2022 will be a daunting task.

Ministry of finance has estimated current account deficit at one
billion dollars in June

In the wake of these challenges, FBR is striving hard to improve domestic tax collection through various policy and operational level efforts.  Economic growth in Pakistan is facing challenging situation due to wider macroeconomic imbalances. The current account deficit which remained high during the first 3 quarters of current fiscal year may decelerate by end of this fiscal year and onwards. The delayed pass-through of international oil prices into domestic energy products may increase inflation. Inflationary pressure may ease once international commodity prices start decline and stabilize. Going forward, Pakistan’s growth prospects are expected to remain satisfactory. But the number of potential risks may diverge it from optimal path. First, the cyclical position of Pakistan’s main trading partners is somewhat deteriorating. Their central banks are raising interest rates to counter inflation thus leading to possible recession in those countries. Second, SBP may further raise domestic interest rates. The demand management policy of SBP may not be very effective as the current waves of inflation are largely caused by supply constraints and increasing international prices, especially commodity prices. Exchange rate depreciation is also a source of concern as it makes the imported raw material more expensive. Third, the persistent rise in domestic consumer prices is eroding real incomes, limiting the spending power of consumers and investors. These risk factors may challenge the macroeconomic environment and growth prospects, especially by negatively affecting the temporary cyclical output gap. The economy would tend back to potential output in the long runs. Sound policy responses may lay the basis for a sustainable long run growth trajectory. This should be accompanied by measures that aim to strengthen the growth of Pakistan’s potential output. These measures need to include the creation of a beneficial investment climate, confidence promotion and stimulus for promising economic initiatives with high growth potential.

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