Finance Ministry has said that the revised policy rate of State Bank could not give results to control inflation in the country as the current waves of inflation are largely because of supply constraints and increasing international prices.

The Finance Ministry has issued monthly Economic Data and Outlook here on Wednesday. The ministry said that the economic growth in Pakistan is facing challenging situation due to wider macroeconomic imbalances.

The number of potential risks may diverge it from optimal path. First, the cyclical position of Pakistan’s main trading partners is somewhat deteriorating. Their central banks are raising interest rates to counter inflation thus leading to possible recession in those countries.

In US, inflation has likely peaked on YoY terms and will stay well above the Fed’s target through the end of 2022 as Russia-Ukraine conflict keeps food and energy prices elevated. The Federal Reserve raised its benchmark interest rates three-quarters of a percentage point in its most aggressive hike since 1994.

Second, The State Bank of Pakistan (SBP) may further raise domestic interest rates. The demand management policy of SBP may not be very effective as the current waves of inflation are largely caused by supply constraints and increasing international prices, especially commodity prices. The exchange rate depreciation is also a source of concern as it makes the imported raw material more expensive.
Headline inflation (CPI) in May FY2022 was recorded at 13.8 percent against 10.9 percent in the same month last year in Pakistan. Escalating food prices, high transportation cost and rising fuel and energy prices remained major drivers of inflation.

The persistent rise in domestic consumer prices is eroding real incomes, limiting the spending power of consumers and investors. Inflation in Pakistan is driven by both external and internal factors. International commodity prices, especially oil and food prices are the main external drivers. Furthermore, domestic supply chain and market expectations also play an important role to determine inflation. The inflation has been rising since September 2021 which is expected to continue in June 2022.

Uncertain geopolitical situation due to Russia-Ukraine conflict has exacerbated the uncertainty and intensified the supply disruptions as observed by skyrocketing international commodity prices. Both countries have significant export share in the world trade especially in agriculture and energy products. Pakistan being a net importer of energy and food items is also affected by rising international prices.

The Government has withdrawn subsidies on fuel and energy products to control the mounting twin deficit. As a result, sharp increase in prices of all oil products is witnessed. Further, the recent rise in international commodity prices especially energy and food, will also be translated into domestic prices. The government will continue to alleviate the burden of the poorest segment of the society through various programs. In this scenario, YoY inflation is expected to accelerate in June and may remain within range of 14.5 -15.5 percent.

The overall fiscal deficit increased to 4.9 percent of GDP (Rs 3,275 billion) during Jul-Apr FY2022 as against the 3.6 percent (Rs 2,020 billion) in the same period of last year. The primary balance posted a deficit of Rs 890 billion (-1.3 percent of GDP) against the surplus of Rs 159 billion (0.3 percent of GDP) during the period under review.

The deterioration has been triggered due to an increase in total expenditure with a higher pace relative to revenues. Total expenditure grew by 32 percent to reach Rs 6,857 billion in Jul-Apr FY2022 as compared to Rs 5,196 billion last year. Current expenditures registered a sharp acceleration of 33 percent mainly due to higher subsidies and grants.

FBR has provisionally collected Rs 5,358.2 billion in Jul-May FY2022 against Rs 4,164.3 billion in the same period last year, representing a growth of 28.4 percent. In May 2022, the net collection was Rs 492.4 billion, a 27.4 percent increase over the Rs 386.6 billion in May 2021.

The Current Account posted a deficit of $ 15.2 billion for Jul-May FY2022 as against a deficit of $ 1.2 billion last year. Current account deficit widened due to constantly growing import volume of energy and non-energy commodities, along with a rising trend in the global prices of oil, COVID-19 vaccines, food and metals.

The total imports in Jul-May, FY2022 increased to $ 72.3 billion ($ 50.0 billion last year), thus posted a growth of 44.5 percent. Main commodities imported were Petroleum products ($10.0 billion), Medicinal products ($ 3.9 billion), Petroleum crude ($ 4.8 billion), Liquefied Natural Gas ($ 4.3 billion), Palm Oil ($ 3.4 billion), Plastic materials ($ 2.8 billion) and Iron & Steel ($ 2.6 billion).

Despite achieving a real GDP growth of 5.97 percent in FY2022, the underlying macroeconomic imbalances and mounting international risks are depicting challenging outlook especially pertaining to external sector.

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