By Staff Reporter
ISLAMABAD: The Finance Ministry sent a stark warning that the country risks a double-whammy of stagflation and an empty coffer as it pushed up its 2023 inflation projections to 26 percent.
“The CPI inflation on YoY basis for January 2023, is forecasted in the range of 24-26 percent,” the ministry said in its monthly economic outlook.
The ministry said annual inflation may be approaching a peak with food inflation appearing close to topping out.
Inflationary pressure is expected to calm down gradually as global commodity prices are showing a downward trend on a year-on-year basis and “its impact will ultimately be transmitted into domestic prices with some lags after adjusting the currency devaluation”.
“While the government kept the administered prices at their current level to stabilize the overall prices, post floods persistent shortfall of essential crops is preventing inflation from settling down,” the ministry said.
“SBP is also enacting a contractionary monetary policy to contain inflationary pressure. However, a larger portion of volatility in the current price level is explained by supply-side factors.”
The report said the country is currently confronted with challenges like high inflation, low growth, and low levels of official foreign exchange reserves. Further month-on-month increases in consumer prices may be countered by a further mean reverting international commodity prices and some exchange rate stability due to decreased pace of depreciation.
The overall money supply growth remains compatible with a return to low and stable inflation. But the outlook of M2 is broadly dependent on fiscal accounts which are under immense pressure on account of heavy interest payments and rehabilitation spending.
Nonetheless, the first five months of CFY have ended with some developments; containing fiscal deficit and surplus in primary balance due to effective fiscal management.
“Fiscal consolidation is key to saving official reserves and exchange rate stability. This may temporarily be costly in terms of growth prospects in the short term, but long-run prosperity and growth can only be achieved by augmenting the country’s long-term equilibrium growth path by expanding production capacities and productivity.”
The ministry said economic activity is following a lower growth path since the start of the current fiscal year.
“Furthermore, the slowdown in global growth especially in main export markets along with the tight monetary policy stance by central banks (17 percent policy rate in January 2023) and low export growth also affected economic growth in Pakistan negatively.”
It said the current account balance slightly deteriorated in the month of December.
“This was mainly due to an increase in primary income payments and a decrease in remittances. It is expected that in January these payments would return to normal levels. Together with the expected improvement in the trade balance due to prudent government measures, the current account deficit may decline in January and stabilize during the second half of FY2023.”
The ministry said the government has adopted tight fiscal and monetary policies to combat the economic problems brought on by both internal and external forces. “Currently, the government is facing the difficult task of supporting vulnerable segments of society and meeting other public spending needs, in particular, rising interest servicing.”
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