The Finance Ministry on Friday warned of further inflation due to hikes to utility prices, the benchmark interest rate and the recent devaluation of the Pakistani rupee against the U.S. dollar, as the Pakistan Bureau of Statistics (PBS) reported that year-on-year inflation in March had hit 35.4 percent.
“Inflation may further jack up as a result of a second-round effect,” read the ministry’s Monthly Economic Update and Outlook report, noting that political and economic uncertainties were triggering expectations of higher inflation. According to the PBS, the short-term inflation measured by the Sensitive Price Indicator (SPI) hit 40.4 percent in March, compared to 33.6 percent a month earlier and 13 percent a year ago. Meanwhile, the inflation recorded by the Consumer Price Index (CPI) reached 35.4 percent in March, a near record high, compared to 31.5 percent a month earlier and 12.7 percent in March 2022.
According to the ministry’s report, inflation was expected to remain elevated in the near-term due to market forces determined by the supply and demand gap of essential items; exchange rate depreciation; and the upward adjustment of prices of petrol and diesel. Production losses due to last year’s floods would also start to felt shortly, it warned, emphasizing this was particularly true of major agricultural crops. “Consequently, the shortage of essential items has emerged and persisted,” it said, adding that prevailing political and economic uncertainty was also fueling inflation.
The report also acknowledged that ineffective policy measures and authorities’ inability to contain the inflationary spiral had contributed to economic pressures, saying demand pressures linked to Ramzan were also to blame. Referring to the fasting month, it said the practice of bulk buying might further boost the supply-demand gap and cause greater prices of essential items. However, it stressed, the government was aware of this and was working with all provincial governments to ensure a smooth supply of essential items.
According to the Finance Ministry, this year’s spring rains and forecasts of an early heatwave in the next two months could adversely impact wheat production. Ending on optimism, however, the report said that the economy was showing signs of resilience, as the fiscal and current account deficits had been effectively curtailed during the ongoing fiscal year.
The report stated that the total cost of the ongoing free wheat subsidy for the impoverished was nearly Rs. 100 billion, including Rs. 15.6 billion that the Sindh government was disbursing through a targeted mechanism under the Benazir Income Support Program. Of the rest, it said, Punjab would spend Rs. 64 billion on the wheat subsidy, while Khyber-Pakhtunkhwa would spent Rs. 19.7 billion.