Finance Ministry says: Inflation rate driven by monetary, supply-side factors

ISLAMABAD: The Ministry of Finance on Thursday conceded that Pakistan’s inflation rate was mainly driven by monetary and supply-side factors such as domestic and international commodity prices, depreciating rupee-dollar exchange rate, seasonal factors and economic agents expectations.

The Ministry of Finance stated that the recent surge in international oil prices, exchange rate depreciation and adjustments in administered prices are fueling price hikes. “The effect of these impulses may intensify the magnitude of prices and transportation cost,” the Ministry of Finance warned in its monthly economic report released here on Thursday.

Dwelling upon increasing the current account deficit, the report states that nevertheless, the economic expansion may go along with a current account deficit.

“It is normally recognized that emerging and developing countries run current account deficits, financed by financial inflows from developed nations. It is strongly realized that as long as the deficits are manageable, their contribution remains productive for achieving the higher and sustainable growth trajectory, necessary for the convergence of per capita income with developed countries” it added.

It states although the revival of economic activities started within the country, however, unprecedented increase in international commodity prices is putting pressure on domestic prices as well as on the Pakistani rupee.

“Pakistan’s inflation rate is mainly driven by monetary and supply-side factors i.e. domestic and international commodity prices, USD exchange rate, seasonal factors and economic agents’ expectations concerning the future developments of these indicators” it maintained.

The government’s structural policies to improve the functioning of market structure, particularly the food markets, play an important role. Since May 2021, YoY inflation has observed a downward trend till September 2021.

Traditionally, the month of October shows positive seasonality. On the other hand, the government is committed to ensuring the smooth supply of essential commodities in domestic food markets to protect the livelihood of the people.

If there would be no additional impulses in October, then YoY inflation may decelerate. All in all, the central forecast for October and beyond shows resumption of the downward trend in YoY inflation, but within a broad uncertainty range. YoY inflation rate in October is expected to settle below the level observed in September, but the probability range is wide.

Agriculture: The preliminary production estimates of major Kharif Crops 2021 are encouraging. The inputs availability will remain satisfactory as more certified seeds for wheat and other crops will be ensured for the upcoming Rabi 2021-22 season, thus it is expected that in the absence of any adverse climate shock, the agriculture sector will surpass its target of 3.5 percent.

Preliminary estimates of important Kharif crops in 2021 reported the production of sugarcane increased to 87.7 million tonnes from 81.0 million tonnes of last year’s production witnessing an increase of 8.2 percent. Rice production is estimated at 8.8 million tonnes, showing an increase of 5.0 percent over last year’s production of 8.4 million tonnes. Maize production estimated at 9.0 million tonnes increased by 0.8 percent compared to 8.9 million tonnes last year. The cotton production witnessed an increase of 19.8 percent to 8.5 million bales against last year’s production level of 7.1 million bales. On the agriculture inputs, the side situation remained favorable.

According to Pakistan Automotive and Manufacturing Association (PAMA), farm tractors production and its sales increased by 11.3 percent (12,533) and 12.1 percent (12,025), respectively in July-Sept FY2022. During July-Sep, FY2022, the agriculture credit disbursement increased by 14.7 percent to Rs291.9 billion compared to Rs254.6 billion during the same period last year. The urea off-take during August 2021 was 649 thousand tonnes showing an increase of 13.1 percent over August 2020. Whereas, DAP offtake was 187 thousand tonnes, which decreased by 36.8 percent over the same time frame last year.

The performance of large-scale manufacturing (LSM) witnessed a broad-based YoY growth of 12.74 percent in August 2021 on the back of improved business confidence and consumer demand. On a MoM basis, LSM accelerated by 2.09 percent as compared to -5.08 percent in July 2021. The overall growth of LSM during Jul-Aug FY2022 clocked at 7.26 percent reaching well above the pre-pandemic level. During the period, 12 out of 15 subsectors of LSM have witnessed positive growth. Automobile shows massive growth of 55.33 percent, Iron & Steel Products by 14.34 percent, Pharmaceuticals by 18.67 percent, Leather Products by 20.21 percent, Wood Products by 15.81 percent, and Chemicals grew by 6.36 percent. The latest trends in high-frequency indicators also indicate economic recovery as car production and sale increased by 87.7 and 80.5 percent respectively, during July-Sep FY2022, while tractor production and sale increased by 11.3 and 12.1 percent respectively. Domestic cement dispatches increased by 3.92 percent to 11.279 million tonnes during July-Sep FY2022 (10.853 MT last year). Total oil sales increased by 21.0 percent to 5.8 million tonnes during July-Sep FY2022 (4.8 million tonnes last year). On a YOY basis, total oil sales increased by 26 percent to 1.9 million tons in September 2021 (1.5 million tons last year).

The fiscal deficit in July-Aug FY2022 was recorded at 0.9 percent of GDP, the same as in the comparable period of last year. In absolute terms, it stood at Rs 462 billion in July-Aug FY2022 against Rs 415 billion recorded last year. During the first two months of FY2022, the primary balance showed a deficit of Rs 37 billion, compared to a surplus of Rs 69 billion in the comparable period last year. Net revenue receipts increased by 7.1 percent to Rs 470 billion in July-Aug FY2022, compared to Rs 439 billion last year. The sharp rise in FBR tax collection during the period under review contributed significantly to the increase in revenue receipts. PSDP spending jumped by 18.9 percent to Rs 63 billion in July-Aug FY2022, compared to Rs 53 billion in the same period of last year.

FBR provisional net tax collection grew by 38.2 percent to Rs 1396.4 billion in Q1 FY2022 against Rs 1010.2 billion in the same period of last year. The net collection exceeded its quarterly target by 15.3 percent. In absolute terms, FBR collected Rs.186 billion higher revenues than the target fixed for Q1 FY2022.

The current account posted a deficit of $3.4 billion (4.1 percent of GDP) for July-Sep FY2022 as against a surplus of $865 million (1.2 percent of GDP) last year. The current account deficit widened due to the constantly growing import volume of energy and non-energy commodities, along with a rising trend in the global commodity prices, COVID-19 vaccines, food, and metals.

Exports on fob grew by 35.2 percent during July-Sep FY2022 and reached $7.2 billion ($5.4 billion last year). As per PBS, during July-Sep, FY2022, exports increased by 27.9 percent to $6.9 billion ($5.5 billion last year). The exports grew by 27.7 percent to $2.4 billion as against $1.9 billion last year, on the back of rising demand from the global market along with exports promotion policies of the government. The increase in overall exports is contributed by the growth in exports of value-added sectors.

The total imports in July-Sep, FY2022 increased to $18.7 billion ($11.3 billion last year), posting 66.1 percent growth. Main imported commodities were petroleum products, Palm Oil, petroleum crude, Iron & Steel, Liquefied Natural Gas, medicinal products, plastic materials, textile machinery, electrical machinery & apparatus, power generating machinery, and raw cotton.

In July-Sep FY2022, workers’ remittances reached $8.0 billion ($7.1 billion last year), increased by 12.5 percent. Workers’ remittances continued their unprecedented streak of above $2.0 billion for the 16th consecutive month in September 2021. YoY, remittances grew by 16.9 percent to $2.7 billion in September 2021 ($2.3 billion in September 2020).