Afghan border closure to push inflation higher

The government on Monday predicted that the inflation barometer would rise to 6% in the current month due to floods and closure of Pak-Afghan border, the two temporary factors that the central bank also cited to keep its policy rate unchanged.

Flood-related supply disruptions and temporary border closures have put upward pressure on prices of a few essential commodities and inflation is expected to remain in the range of 5-6% in October, according to the monthly economic outlook the finance ministry released on Monday. The report underlined that due to recent floods, there was a risk of inflationary pressure. Inflation, though temporarily affected by food-supply pressures, is expected to remain within target, it added.

Cross-border trade between Pakistan and Afghanistan has been suspended due to skirmishes along the border and Pakistan's clear stance to go after terrorists hiding in Afghanistan.

For the current fiscal year, the government has given a 7% inflation target to the central bank, which remains on track despite some early setbacks. However, the central bank is giving confusing signals to the market. In its statement, the SBP said that the Monetary Policy Committee (MPC) noted that headline inflation rose significantly to 5.6% in September, whereas core inflation remained unchanged at 7.3%. Its admission that the core inflation stayed at 7.3% despite floods was enough to reduce the policy rate to single digits.

The bank said that the MPC assessed that the impact of recent floods on the broader economy appears to be somewhat lower than anticipated at the time of its previous meeting.

Crop losses are likely to be contained, whereas supply disruptions turned out to be minimal. Moreover, economic activity gained further momentum, as depicted by the robust growth in high frequency economic indicators. Based on these developments, the overall macroeconomic outlook has improved from the previous assessment.

Given the low level of inflation, the central bank should cut the interest rate to single digits, said Bilal Azhar Kayani, Minister of State for Finance, on Monday. He said that there was significant room to reduce the rate even after keeping the inflation-adjusted interest rate positive. In its economic outlook, the finance ministry said that there was a negative growth in the money in circulation during the current fiscal year. It is also an indication of faltering demand in the economy.

The ministry stated that from July 1 to October 3, money supply (M2) showed a negative growth of 2.6% as compared to the negative growth of 1.9% last year. Within M2, net foreign assets (NFA) of the banking system increased by Rs174 billion as compared to a rise of Rs189 billion last year. However, net domestic assets (NDA) decreased by Rs1.24 trillion as compared to the decrease of Rs863.9 billion last year.

The ministry said that despite floods, Pakistan's economy remained on a recovery path. Industrial activity stays resilient, supported by a rebound in large-scale manufacturing (LSM), particularly in cement, automobile and allied sectors, while exports and remittances are showing steady improvement. However, in August, LSM marginally grew by 0.5% year-on-year, while month-on-month it dropped by 2.7%.

According to a preliminary assessment, the floods have caused Rs430 billion losses to the agriculture sector, damaging crops of rice, cotton, sugarcane, maize, fodder and vegetables. Nevertheless, recent indicators suggest that recovery efforts are underway, supported by increased agricultural credit, higher machinery imports and improved fertiliser offtake, said the finance ministry.

The report claimed fiscal stabilisation on the back of one-off benefit in the shape of central bank profit. The finance ministry said that during the July-September period, the FBR's tax collection rose to Rs2.884 trillion, up 12.5%. However, it missed the target by Rs198 billion.

During Jul-Aug, net federal revenues surged 231.4% to Rs3.3 trillion compared to Rs987 billion in the same period of last year. The improvement was driven by a 721% jump in non-tax revenues.

The surge in non-tax revenues was mainly led by higher SBP profits, supplemented by higher dividends, defence receipts, the windfall levy on crude oil, gas infrastructure development cess and petroleum levy.