Inflation forecast cut to 9.5%

It will pile pressure on SBP to reduce policy rate significantly

ISLAMABAD:

The federal government on Friday cut its inflation forecast for August to single digit in a move that would put more pressure on the central bank to make a steep reduction in interest rate in the upcoming monetary policy meeting.

On account of stability in economic indicators, inflation is expected to remain within the range of 9.5% to 10.5% in August and it will further decline to 9% to 10% in September, said the Ministry of Finance in its monthly economic outlook.

The forecast was lower than earlier projection of 11% for August, which the economic advisory wing of the finance ministry gave last month.

The central bank is scheduled to convene monetary policy committee meeting on September 12 to set policy rate for the next two months. It has come under strong criticism for gradual reduction in interest rate despite a significant slowdown in inflation.

It set the policy rate at 19.5% in the last meeting. However, sources said Finance Minister Muhammad Aurangzeb and the military leadership were not content with the extra cautious approach of the central bank, which was hampering economic growth and leading to bleeding of fiscal accounts.

The finance ministry has set aside Rs9.8 trillion for interest payments in the current fiscal year, based on average 18% interest cost.

However, State Bank of Pakistan (SBP) Governor Jameel Ahmad stated in a parliamentary committee meeting that the actual interest cost should be seen by excluding the profit of Rs2.5 trillion the central bank would give to the federal government in the current fiscal year.

The finance ministry's report underlined that the monetary policy was easing owing to low inflationary pressures. During the first month of FY25, money supply (M2) shrank by 3.2%, which was sharper than the previous year.

It said that policy rate adjustment would keep inflationary expectations well anchored and support sustainable economic recovery during the year.

The finance ministry stressed that Pakistan's economy kicked off the current fiscal year with firm positive developments, setting a positive tone for the months ahead.

It pointed out that last month there was a drop in CPI inflation, which suggested that the economy was on track to achieve single-digit inflation in the coming months. Both fiscal and external sectors have shown resilience, attributed to improved management, it said, adding that current account improved and tax collection exceeded target in July.

Inflation was recorded at 11.1% in July on a year-on-year basis while on a month-on-month basis, it increased by 2.1%.

There was a sharp uptick in inflation last month due to budgetary measures that sent the cost of necessary goods skyrocketing.

The finance ministry hoped that large-scale manufacturing would sustain its positive growth trajectory in the current fiscal year on the back of improved external demand, a stable exchange rate, receding inflation and easing of monetary policy.

But it said that agricultural outlook for Kharif 2024 was dependent on crop-specific weather patterns, which would play a critical role in crop yields. Recent and ongoing rains can have positive and negative impacts on crops of rice, sugarcane, cotton, fodder and vegetables, if the showers did not sweep away farmlands, it added.

Urea offtake during Kharif 2024 (April-July) remained 13.5% less than Kharif 2023 while di-ammonium phosphate (DAP) offtake increased by 8.2%.

On the external front, the ministry said that exports, imports and workers' remittances were following an upward trend. It is expected that exports will remain within the range of $2.5-3.2 billion, imports $4.5-5 billion and remittances $2.6-3.3 billion in August 2024.