Government raises inflation forecast to 13.5%

Islamabad:

Ahead of the start of a tumultuous financial year, the government on Friday raised its inflation forecast for next month to 13.5%—a rate above its annual target of 12% next fiscal year, signaling continued economic hardship circumstances. The inflation outlook for June 2024 has risen slightly compared to the previous month, the finance ministry said in its monthly economic outlook report, adding that the rise in the forecast was mainly due to higher prices of perishable items due to Eidul Azha.

Market analysts are predicting a strong surge in inflation from July 1 – the date for the implementation of the new budget in which the government aims to collect an additional Rs 3.6 trillion from people and companies. Despite higher perishables prices during the month, the finance ministry said government measures to reduce transport charges are expected to keep June 2024 inflation in the 12.5% ​​to 13.5% range.

Fuel prices are also expected to rise from Monday after a brief period of decline. The government has increased the oil levy on petrol and diesel to Rs 70 per litre. The government ends the fiscal year on a sour note as it, along with the State Bank of Pakistan (SBP), remained unable to contain the average inflation rate for this fiscal year to 21% despite imposing record high interest rates.

For the new fiscal year, the government has set an inflation target of 12 percent, but the International Monetary Fund (IMF) and independent economists are predicting a higher rate than the government’s official target. The economic advisory wing of the finance ministry said the government is implementing various administrative, policy and relief measures to control inflationary pressures. These actions, combined with efforts to boost food availability, reflect the government’s commitment to contain inflation, he added.

Contrary to these high hopes, the government imposed taxes on baby milk, packaged milk, milk sold by dairy farms, a 10% tax on poultry feed, and an 18% tax on imported vegetables and fruits. The finance ministry said that by managing supply and demand, the government aims to stabilize prices and moderate market volatility, presenting a more optimistic outlook for inflation.

The pace of price increases slowed to 11.8% in May due to the higher base effect of May 2023 and stability in perishable goods prices. The finance ministry said economic activities strengthened in the second half of the outgoing financial year with a downward trend in inflationary pressures, stability in external accounts and gradual recovery in industrial activities due to various policy and administrative measures. He added that these stability factors, combined with improving external demand, have collectively provided a significant boost to domestic economic activities.

The ministry added that the stability of exchange rates, bolstered by improvements in the external account and external inflows, coupled with the expected decline in global oil and commodity prices, is restoring the confidence of economic actors, thereby facilitating economic growth. However, difficult growing conditions persist, with farmers advised to take measures based on the recent extreme heatwaves as soil moisture is under pressure in most parts of the country. Accordingly, seasonal crops like cotton, groundnut, sugarcane, seasonal vegetables and orchards are under water stress and require additional irrigation in most parts of the country, he added.

Despite highly contractionary economic policies, the ministry notes an upward trend in industrial development. Large-scale manufacturing registered a modest growth of 0.8% in the July-April period of the current financial year, with this recovery likely to continue in the coming months on the back of a boost in external demand, improvement in business confidence and the lifting of restrictions on imports. Additionally, subdued inflationary pressures and a shift in monetary policy will likely boost business confidence, thus expecting LSM to be on an upward growth trajectory in the remaining months as well as the next financial year.

The finance ministry said the Federal Board of Revenue (FBR) is making all efforts to meet the tax revenue target for the full year, while on the expenditure side, the government continues to follow a cautious approach to contain the fiscal deficit. within manageable limits. . The ministry expressed hope that this fiscal year will end on a path of economic stabilization with improved macroeconomic indicators, adding that Pakistan’s growth prospects for the next fiscal year are expected to remain encouraging.

The FY 2025 budget aims for sustainable and inclusive growth, focusing on high-potential sectors such as IT, MSME, mines and minerals, tourism, exports and agriculture. However, fiscal discipline and effective implementation of domestic development programs, along with bilateral and multilateral cooperation, will be essential for a sustainable development path in the coming years.