Inflation is expected to exceed 9%

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ISLAMABAD:

Inflation could exceed 9% due to monetary expansion and a surge in international commodity prices and the current account deficit could remain above half a billion dollars in August, according to a new report from the Ministry of Finance.

The monthly economic outlook report for August also forecast about $ 5.5 billion in imports in August as well, which again became a major reason for the widening current account deficit.

Year-on-year inflation is expected to fluctuate around 7.6% – 9.2% in August, according to the report prepared by the economic advisory wing of the finance ministry.

He added that Pakistan’s inflation rate is mainly determined by current and past fiscal and monetary policies, international commodity prices, the US dollar exchange rate, seasonal factors and the expectations of economic agents regarding l future development of these indicators.

Inflation was recorded at 8.4% in July 2021.

Read The threat of inflation looms

The recently launched three-year roadmap for economic growth describes an “acceptable level of inflation” among the main challenges.

For a country like Pakistan, an inflation rate of around 7% is acceptable, said Dr Ashfaque Hasan Khan, former adviser to the finance ministry.

Monetary expansion has also remained a reason behind a higher than expected inflation rate in the country, but it has not been discussed publicly in depth.

The Ministry of Finance report said that in the last fiscal year the money supply expanded by 3.4 trillion rupees, a growth of 16.2 percent from the previous year. He added that an increase in international commodity prices can increase pressure on domestic inflation as well as on the balance of payments.

The trade deficit in goods and services is expected to stabilize at around $ 3 billion in August, the ministry said. The current account deficit is expected to remain at manageable levels given the average monthly remittances of around $ 2.5 billion and other secondary and primary income streams.

The finance ministry said imports of goods and services will reach around $ 6 billion this month, which involves around $ 5.5 billion in merchandise imports. As a result, the current account would remain in deficit at moderate monthly levels of around $ 500 million this month, the ministry said.

The current account posted a deficit of $ 773 million (or 2.8% of GDP) in July against a surplus of $ 583 million last year.

The central bank has predicted a current account deficit of up to $ 9.5 billion this fiscal year, compared to $ 13 billion projected by the finance ministry.

The finance ministry said the current account deficit has widened due to the increasing volume of imports of energy and non-energy products, as well as an upward trend in global prices for oil, Covid-19 vaccines. , food and metals.

On the one hand, the global economic recovery, especially among Pakistan’s major trading partners, is a good sign for the growth of exports and workers’ remittances. However, rising international commodity prices are becoming a downside risk in terms of high import value and increasing inflationary pressures for Pakistan, he added.

Read more Inflation slows to 8.4% in July

Aware of these risks, the government has already initiated the constitution of strategic reserves of basic products as well as a vigilant control of imports, he added.

The report said that in the absence of any unexpected major negative shocks, the economy is moving smoothly towards a balanced and sustainable growth path.

In July 2021, strong year-over-year growth in large-scale manufacturing was also expected based on the continued upward cyclical trend among major trading partners and domestic growth momentum, he added.

Although LSM has shown double-digit growth, the quantum index still remains below the pre-Covid level.

The revival of economic activities and the acceleration of the vaccination process hold promise for achieving strong economic growth. On the other hand, the risks of a pandemic upsurge, as well as the increase in international prices of raw materials still exist. In this regard, the measures taken by the government to build up strategic reserves, particularly related to food, as well as measures to increase exports will certainly mitigate the associated risks.

Posted in The Express Tribune, August 29e, 2021.

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