Inflation is likely to slow to 4% in December

Islamabad:

The government said on Friday that inflation may slow further to 4% in December – a forecast that gives more room to cut interest rates to single digits and shows that the annual target will be met.

In its monthly economic outlook, the finance ministry said there was significant stability on the fiscal and external fronts, promising an “optimistic outlook”. Inflation is expected to remain within the 4-5% range for December, according to the finance ministry’s economic advisory wing.

It said a nine percentage point cut in interest rates over the past six months is expected to boost economic activity.

If inflation falls to 4%, this will again give room for interest rates, which currently stand at 13%, to fall by nine percentage points. Last month, inflation slowed to a 78-month low of 4.9 percent, according to the finance ministry.

The State Bank’s monetary policy committee decided to further cut the policy rate by two percentage points to 13%, effective from December 17, 2024. Cumulatively, the policy rate has been cut by nine percentage points since June.

The decision is based on the outcome of inflation in line with expectations, fiscal and external sector stability, favorable global commodity prices and improved growth prospects.

The interest rate cut will significantly reduce the cost of servicing the government’s debt and additional fiscal space can be used to offset the revenue shortfall. Till Friday, the Federal Board of Revenue (FBR) collected about Rs 5.07 trillion and needs to collect another Rs 940 billion in the remaining four days to meet the IMF condition.

The finance ministry said that on the external front, the hard-won stability was expected to continue due to remittances and export inflows with decent imports. This will be complemented by stable exchange rates and limited inflation.

He added that the improved fiscal performance from July to October, driven by higher revenue and prudent expenditure management, is expected to create fiscal space for development spending and support sustainable economic growth.

According to the summary of fiscal operations, net federal revenue rose 72 percent to Rs 4.8 trillion. This growth was mainly due to the sharp rise in non-tax collection due to the decision to freeze the central bank’s full-year profit of Rs 2.5 trillion in the first quarter.

Non-tax revenue doubled to Rs 3.2 trillion in four months. However, spending also remained high despite a near-halt in development spending. The report showed that spending rose 20.6% to Rs 4.5 trillion in four months. In the last financial year, the expenditure was Rs 3.7 trillion during the July-October period.

The finance ministry said Pakistan’s economy showed steady positive developments from July to November, indicating an optimistic outlook for the current year.

Macroeconomic fundamentals strengthened, characterized by further deceleration in CPI inflation with stable food prices, effective fiscal consolidation resulting in fiscal surplus, current account surplus supported by increased exports and remittances and accommodative monetary policy stance.

However, the large-scale manufacturing (LSM) sector remains a problematic sector. In October, the LSM registered marginal growth of 0.02%. The industrial sector suffered due to high interest rates, taxes and the cost of doing business.

On a monthly basis, the LSM fell 2.2 percent in October, mainly due to a seasonal decline in the beverage sector, the finance ministry said.

The drinks sector’s output has also been affected by undue taxation despite warnings in June that the sector would collapse under the weight of higher taxes.

However, the finance ministry said that as winter approached, demand for beverages typically fell, leading to lower production. Overall, 12 of the 22 LSM sectors performed positively in October, demonstrating resilience and continued growth in key sectors, he added.

The ministry said the performance of the agriculture sector depends on rains, adding that for Rabi 2024-25, the government has set a wheat production target of 27.92 million tonnes from an area of ​​9.262 million hectares. To achieve this, concerted efforts are underway to ensure timely availability of key inputs, including agricultural credit, quality seeds, fertilizers and mechanization support.

The external account position has improved significantly, due to a marked increase in exports and remittances despite higher imports. In the first five months, the current account showed a surplus of $944 million compared to a deficit of $1.7 billion last year.

In November alone, the current account recorded a surplus of 729 million. dollars compared to a deficit of 148 million dollar in November last year. “This represents the fourth consecutive monthly surplus,” he added.