Govt raises inflation forecast to 13.5%

June inflation expected to surpass next fiscal year target

Market analysts are predicting a strong wave of inflation from July 1—after the implementation of the new budget. PHOTO: AFP

ISLAMABAD:

Just before the beginning of a stormy fiscal year, the government on Friday increased the inflation forecast for the outgoing month to 13.5%—a rate above the next fiscal year’s annual target of 12%, indicating the continuation of difficult economic times. The inflation outlook for June 2024 has slightly increased compared to the previous month, the Ministry of Finance stated in its monthly economic outlook report, adding that the rise in the forecast was primarily due to higher prices of perishable items driven by Eidul Azha.

Market analysts are predicting a strong wave of inflation from July 1—the date for the implementation of the new budget in which the government has targeted collecting an additional Rs3.6 trillion from people and companies. Despite the higher prices of perishable items during the month, the finance ministry said that government measures to reduce transport charges are expected to keep June 2024 inflation within the range of 12.5% to 13.5%.

Fuel prices are also expected to increase from Monday after a brief reduction period. The government has increased the petroleum levy on petrol and diesel to Rs70 per litre. The government is ending the fiscal year on a sour note, as it, along with the State Bank of Pakistan (SBP), remained unable to restrict the average inflation rate for this fiscal year to 21% despite imposing record high interest rates.

For the new fiscal year, the government has set the inflation target at 12%, but the International Monetary Fund (IMF) and independent economists foresee a higher rate than the government’s official target. The Economic Advisor wing of the finance ministry stated that the government was implementing various administrative, policy, and relief measures to control inflationary pressures. These actions, coupled with efforts to boost the availability of food items, reflect the government’s commitment to curbing inflation, it added.

Contrary to these high hopes, the government has imposed taxes on infant milk, packaged milk, milk sold by dairy farms, a 10% tax on poultry feed, and an 18% tax on imported vegetables and fruits. The finance ministry said that by managing supply and demand, the government aims to stabilise prices and mitigate market volatility, presenting a more optimistic inflation outlook.

The pace of price increases slowed to 11.8% in May due to the higher base effect of May 2023 and stability in the prices of perishable goods. The finance ministry said that economic activities gained traction during the second half of the outgoing fiscal year with a declining trend in inflationary pressures, stability in external accounts, and gradual recovery in industrial activities due to various policy and administrative measures. It added that these stability factors, coupled with improvement in foreign demand, have collectively provided significant impetus to domestic economic activities.

The ministry added that exchange rate stability, bolstered by improvements in the external account and external inflows, combined with an anticipated decline in global oil and commodity prices, is restoring the confidence of economic agents, thus facilitating economic growth. However, difficult cultivation conditions persist, with farmers advised to take measures based on recent extreme heat wave events, as soil moisture is under stress in most parts of the country. Accordingly, seasonal crops like cotton, peanut, sugarcane, seasonal vegetables and orchards are under water stress and require additional irrigation in most parts of the country, it added.

Despite highly contractionary economic policies, the ministry sees an upward trend in industrial growth. Large-scale manufacturing witnessed moderate growth of 0.8% during the July-April period of this fiscal year, with this turnaround likely to continue in upcoming months due to stimulated external demand, improved business confidence, and the removal of import restrictions. Moreover, the subsiding inflationary pressures and the shift in monetary policy will likely boost the business confidence thus expecting LSM to be on the upward growth trajectory in the remaining months as well as the next fiscal year.

The finance ministry said that the Federal Board of Revenue (FBR) was making all efforts to meet its full-year tax revenue target, while on the expenditure side, the government continues to adhere to a cautious approach to keep the fiscal deficit within manageable limits. The ministry expressed hope that this fiscal year would end on an economic stabilisation path with improved macroeconomic indicators, adding that Pakistan’s growth prospects for the next fiscal year are expected to remain encouraging.

The budget for fiscal year 2025 aims for sustainable and inclusive growth, focusing on high-potential sectors like IT, SMEs, mines and minerals, tourism, exports, and agriculture. However, fiscal discipline and effective implementation of home-grown growth programmes, along with bilateral and multilateral cooperation, will be necessary for a sustainable growth path in the coming years.

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