Inflation likely to slow down to 4% in December

Finance ministry cites stability on fiscal and external fronts, which indicates optimistic outlook

Listen to article

ISLAMABAD:

The government said on Friday that inflation may further decelerate to 4% in December – a forecast that provides more room to bring interest rate down to single digit and indicates that the annual target will be achieved.

In its monthly economic outlook, the Ministry of Finance said that there was considerable stability on fiscal and external fronts, which promised an "optimistic outlook". Inflation is anticipated to remain within 4-5% range for December, according to the economic advisory wing of the finance ministry.

It said that a nine-percentage-point reduction in interest rate in past six months was expected to stimulate economic activity.

If inflation falls to 4%, this will again provide room to cut interest rate, currently standing at 13%, by nine percentage points. Last month, inflation slowed to a 78-month low of 4.9%, according to the finance ministry.

The State Bank's monetary policy committee decided to further cut policy rate by two percentage points to 13%, effective from December 17, 2024. Cumulatively, the policy rate has been reduced by nine percentage points since June.

The decision is based on inflation outcome in line with expectations, fiscal and external sector stability, favourable global commodity prices and improved growth prospects.

Reduction in interest rate will significantly reduce the government's debt servicing cost and additional fiscal space can be utilised for offsetting revenue shortfall. By Friday, the Federal Board of Revenue (FBR) collected about Rs5.07 trillion and it needs to collect another Rs940 billion in remaining four days to meet IMF condition.

The finance ministry said that on external front, it was expected that the hard-earned stability would continue on the back of remittances and export inflows with decent imports. This will be complemented with exchange rate stability and contained inflation.

It added that improved fiscal performance from July to October, driven by higher revenues and prudent expenditure management, was expected to create fiscal space for development spending and support sustainable economic growth.

According to the fiscal operations summary, net federal revenues grew 72% to Rs4.8 trillion. This growth was primarily driven by a sharp increase in non-tax collection because of decision to book entire fiscal year's central bank profit of Rs2.5 trillion in first quarter.

Non-tax revenues doubled to Rs3.2 trillion in four months. However, expenditures also remained high despite almost halting development spending. The report showed that expenditures grew 20.6% to Rs4.5 trillion in four months. In the last fiscal year, expenditures were Rs3.7 trillion during the July-October period.

The finance ministry said that Pakistan's economy demonstrated sustained positive developments from July to November, indicating an optimistic outlook for the ongoing year.

Macroeconomic fundamentals have strengthened, marked by further deceleration in CPI inflation with stable food prices, effective fiscal consolidation resulting in fiscal surplus, current account surplus supported by increased exports and remittances, and an accommodative monetary policy stance.

However, the large-scale manufacturing (LSM) sector remains a troubled area. In October, LSM recorded a marginal growth of 0.02%. Industrial sector suffered due to high interest rates, taxes and cost of doing business.

On a monthly basis, LSM declined 2.2% in October, primarily driven by a seasonal fall in beverages sector, said the finance ministry.

The beverage sector's production has also been affected by unreasonable taxation despite warnings in June that the sector will crumble under the weight of higher taxes.

But the finance ministry said that as winter approached, demand for beverages typically decreased, leading to lower production. Overall, 12 out of 22 LSM sectors performed positively during October, demonstrating resilience and continued growth in key industries, it added.

The ministry said that agriculture sector's performance was dependent on rains, adding that for Rabi 2024-25, the government has set a wheat production target of 27.92 million tonnes from an area of 9.262 million hectares. To achieve this target, concerted efforts are underway to ensure timely availability of essential inputs, including agricultural credit, quality seeds, fertilisers and mechanisation support.

External account position has significantly improved, driven by a notable increase in exports and remittances despite higher imports. During first five months, the current account posted a surplus of $944 million compared to a deficit of $1.7 billion last year.

In November alone, the current account recorded a surplus of $729 million compared to a deficit of $148 million in November last year. "This represents the fourth consecutive monthly surplus," it added.