Pakistan’s inflation is expected to remain sticky beyond mid-August and into September on rising petrol and diesel rates, reigniting cost of living problems in the country’s stagnant economy, which will likely stoke further disruptions in demand due to higher transportation costs.
Consumer prices have so far spiked since April 2022 in reaction to an aggressive tightening campaign by the previous government; the caretaker setup has started off on the same footing.
Consequently, inflationary forecasts have aggravated after the caretaker government on Tuesday increased petrol prices to 290.45 per and high-speed diesel to 293.4 per liter, taking the prices of both fuel grades to an all-time high.
Prominent analysts are of the view that the upcoming monthly report on consumer prices for August will further push back expectations for policy easing towards the end of this year and reinforce inflation forecasts to remain above 29 percent since the federal government’s hawkish approach is proving to be destructive.
Economic analyst A H H Soomro told ProPakistani,
Inflation will remain sticky these days. The problem is uncontrolled movements in currency. Rupee has to find it’s place soon. There seems to be pent-up import demand but the true problem is low remittances and exports. We are already expecting the year to show +20% inflation, those expectations haven’t changed. Don’t be surprised if there is a further increase in fuel prices due to PDL, IFEM, and OMC margin revision.
To recall, Islamabad previously committed to a petroleum levy of up to Rs. 55 a liter, alongside other painful measures like more taxes, high energy prices, and a market-based exchange rate which has already fuelled inflation.
“You all know the international commitments we have with the IMF regarding the petroleum levy,” Former Finance Minister Ishaq Dar said in July, hinting that these measures could have been avoided without the pledges.
Meanwhile, last month’s July pledge to increase dealer margins remains in limbo as the government has so far avoided an upward revision for two consecutive fortnightly reviews. The threat of strikes is still fresh.
Inflation, SBP’s Reaction
The benchmark consumer price index, CPI, increased to 28.3 percent in July, according to data from the Pakistan Bureau of Statistics (PBS). Dar’s IMF taxes, fuel, and electricity prices since September 2022 have made the largest upward contribution to the change in both the weekly SPI and monthly CPI annual inflation rates, the worst for any finance minister that served during Pakistan’s eventful 76-year history.
The overcharging of taxes on electricity bills already tinged FY23 inflation figures, which came in high despite Islamabad’s reassurances to curb additional tax regimes in 2023-24, dampening any expectations the State Bank of Pakistan may begin to cut its benchmark rate, currently at 22 percent, in the short term. Public consensus sees a hike of 100-200 basis points in next month’s monetary policy review.
Overall, further petroleum price hikes will have inflationary, monetary, and political implications and may offset the schedule for General Elections if the situation worsens.
