Inflation clocked at 4.53% for fiscal 2015

Macroeconomic success achieved through lower global oil prices

ISLAMABAD:

Inflation in Pakistan clocked in at 4.53% for the fiscal year that ended June 30, 2015, helped almost entirely by falling global oil prices. The inflation number is the only macroeconomic target the government has been able to achieve for fiscal 2015, having managed to contain it under the 8% target rate.

The data was released by the Pakistan Bureau of Statistics on Wednesday, with the Consumer Price Index recording an increase of 4.53% and the Wholesale Price Index actually recording a decline of 0.30% for fiscal 2015.

The results released by the national data collecting agency have given at least one reason to the government to feel good about its performance after it missed all the other main macroeconomic targets including those on economic growth, investment and savings. Tax collection also fell far below the official target. And even on inflation, most economists credit exogenous factors.

“Government policies have nothing to do with the low inflation rate. The slump in oil prices and the subsequent correction in commodity prices kept inflation below 5%,” said Muzamil Aslam, a Karachi-based economist, adding that weak demand in the economy also kept prices in check.

Read: May 2015: Food items the cause as inflation inches up to 3.2%

The low rate of inflation also allowed the monetary authorities to cut the benchmark discount rate – the rate at which the State Bank of Pakistan lends money to commercial banks. In its last monetary policy announcement, the SBP cut the discount rate to 7%, the lowest level in 42 years.

However, despite an exceptionally low interest rate environment, the chances for an increase in private sector credit remain dim, as the government remains the single largest borrower, and now accounts for a majority of all lending in Pakistan. The government is also the biggest beneficiary of the cut in interest rates, with lower interest payments.

Aslam expects inflation to stay tame at around 5% in fiscal 2016 as well, citing slow growth in the global economy and weak fundamentals for oil prices, with a supply glut in the United States keeping prices down. For fiscal 2016, which began on Wednesday, the government hopes to contain inflation at 6% or below.

Although exogenous factors are not expected to play any major role in fueling inflation, some endogenous factors may push the indicator up in fiscal 2016. Over the last one year, the government has imposed Rs600 billion in additional taxes, including Rs238 billion that were introduced with effect from July 1. The analysts say that since most of these taxes are indirect in nature, they may affect the prices of commodities in the new fiscal year.

Core inflation

The slump in energy prices appears to have spilled over to other sectors of the economy. Core inflation, which strips out the effect of volatile food and energy prices, also fell to just 4.6% in June, compared to 8.7% last year. It was the declining trend in core inflation, more than the CPI, that prompted the State Bank to lower the discount rate.

Read: Budget 2015-16: Government pegs growth target at 5.5%

Officials at the central bank said that they will keep watching the trends in core inflation in the months ahead. Pakistan has committed to the International Monetary Fund that it will keep real interest rates (nominal benchmark interest rate minus inflation) positive.

For June, the annualised inflation rate was 3.2%, the same level observed in May. Prices of housing, water, electricity, gas and fuels increased 4.8% in June over the comparative period of the last year, according to the PBS. Clothing and footwear prices rose by 5.6% in June from a year ago. The prices of alcoholic beverages and tobacco increased 17% in June compared to last year.


Published in The Express Tribune, July 2^nd, 2015.