Inflation to Remain High and May Rise Further, Warns Finance Ministry

Inflation is expected to remain high, and may even rise further as Pakistan remains engulfed in a spiraling economic crunch.

The Ministry of Finance in its ‘Monthly Economic Update & Outlook’ has warned that inflation is expected to stay at an elevated level owing to market frictions caused by the relative demand and supply gap of essential items, exchange rate depreciation, and recent upward adjustment of administered prices of petrol and diesel. Due to the lagged effect of floods, the production losses especially of major crops have not yet been fully recovered.

Consequently, the shortage of essential items has emerged and persisted. Inflation may further jack up as a result of the second round effect. Another potential reason of the rising price level is political and economic uncertainty. The economic distress resulting from the delay of the stabilization program has exacerbated the economic uncertainty due to which inflationary expectations have remained strong.

Despite SBP’s contractionary monetary policy, inflationary expectations are not settling down. Moreover, bulk buying during the month of Ramadan may cause a demand-supply gap and result in the prices of essential items escalating. However, the government is well cognizant of this and has already taken on board all provincial governments to ensure a smooth supply of essential items.

Inflation in March may remain in the upper bound as observed in February. Recent monetary policy restrictions and efforts towards fiscal consolidation along with the administrative, policy, and relief measures are expected to ease the inflationary pressure by the end of the current fiscal year.

Delayed rains and early heat waves are expected to hurt wheat production this year. Concerning industry, the ministry acknowledged that the current monetary tightening and fiscal consolidation may cause additional short-run pain to the domestic economy, resulting in domestic industrial production falling below its neutral capacity level.

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