Inflation forecasts cut to 9.5%

Islamabad:

The federal government on Friday cut its inflation forecast for August to single digits, a move that would put more pressure on the central bank to cut interest rates sharply at its upcoming monetary policy meeting.

Due to the stability of economic indicators, inflation is expected to remain in the range of 9.5% to 10.5% in August and further decline to 9% to 10% in September, the finance ministry said in its monthly economic outlook.

The forecast was lower than the previous forecast of 11% for August given last month by the finance ministry’s economic advisory wing.

The central bank is scheduled to convene a monetary policy committee meeting on September 12 to set policy rates for the next two months. He has been heavily criticized for gradually cutting interest rates despite a significant slowdown in inflation.

It set the policy rate at 19.5% in the last meeting. However, sources said Finance Minister Muhammad Aurangzeb and the military leadership were unhappy with the central bank’s overly cautious approach, which was hampering economic growth and leading to bleeding of the fiscal accounts.

The finance ministry has earmarked Rs 9.8 trillion for interest payments in the current fiscal year, based on an average interest cost of 18 percent.

However, State Bank of Pakistan (SBP) governor Jameel Ahmad told a parliamentary committee meeting that the true interest cost would have to be seen excluding the Rs2.5 trillion in profits the central bank would give to the federal government during current fiscal year.

The finance ministry report highlighted that monetary policy is easing due to low inflationary pressures. In the first month of the 25th year, the money supply (M2) contracted by 3.2%, which was more than the previous year.

It said the policy rate adjustment will keep inflationary expectations well anchored and support sustainable economic recovery during the year.

The Ministry of Finance emphasized that Pakistan’s economy has started the current financial year with steady positive developments, setting a positive tone for the coming months.

He pointed out that CPI inflation fell last month, suggesting the economy was on track to achieve single-digit inflation in the coming months. Both the fiscal and external sectors have shown resilience, attributed to improved management, it said, adding that the current account balance improved and tax collection exceeded the target in July.

Inflation stood at 11.1% in July on an annual basis, while on a monthly basis it increased by 2.1%.

There was a sharp rise in inflation last month due to fiscal measures that sent the cost of essential goods skyrocketing.

The finance ministry expressed hope that large-scale manufacturing will maintain its positive growth trajectory in the current financial year thanks to improved external demand, a stable exchange rate, falling inflation and easing monetary policy.

However, it said the agricultural outlook for Kharif 2024 depends on crop-specific weather patterns, which would play a critical role in crop yields. Recent and continued rains may have positive and negative effects on rice, sugarcane, cotton, fodder and vegetable crops if the rains did not wash away agricultural land, he added.

Urea uptake during Kharif 2024 (April-July) remained 13.5% lower than Kharif 2023, while diammonium phosphate (DAP) uptake increased by 8.2%.

On the foreign front, the ministry said exports, imports and remittances of workers are on the rise. Exports are expected to remain in the range of $2.5-3.2 billion, imports $4.5-5 billion and remittances $2.6-3.3 billion in August 2024.