An Insight into Pakistan’s Inflation Conundrum : AsiaNet-Pakistan

An Insight into Pakistan’s Inflation Conundrum

December 3, 2021 | | Share:

The seemingly unending upward swing in Pakistan’s consumer prices has become an uphill task to deal with — with particular reference to the rise in recent months — for the government and the public. A global analysis by ProPakistani reveals that Pakistan is not the only country facing surging prices at a time when the world is grappling with a supply crunch in the face of high demand.

An in-depth review unearthed what could be driving the rising inflation in the country and where it could head for.

Pakistan’s Consumer Price Index (CPI)-based inflation remained 11.5 percent in November, the highest rise in the past 21 months. The 27 percent year-on-year increase in the Wholesale Price Index (WPI) in November indicates that prices are likely to remain high during the coming months.

The November CPI data came merely days after the Finance Division claimed that despite new impulses in the month, inflation would remain between 8.5 and 9.5 percent. Similarly, the State Bank of Pakistan (SBP) said in November that global commodity prices and further upward adjustments in administered prices of energy pose upside risks to the average inflation forecast of 7-9 percent in the fiscal year 2022. The International Monetary Fund (IMF) in its World Economic Outlook (WEO) released in October projected the average rate of inflation in Pakistan at 8.5 percent during the current fiscal year. Whereas, Pakistan Institute of Development Economics (PIDE)’s inflation forecasting models predict it to remain between 10.0 to 10.5 percent for the financial year 2022 and 11.0 to 11.5 percent for the first half of the financial year 2023.

What Is Driving Inflation?

The Finance Ministry has linked the rising inflation to monetary and supply-side factors, including domestic and international commodity prices, exchange rate, seasonal factors, and economic agents’ expectations concerning the future developments of these indicators.

The central bank last month raised its benchmark rate by 150 basis points to 8.75 percent, saying price pressures from COVID-induced disruptions to supply chains and higher energy prices are proving to be larger and longer-lasting than previously anticipated across the world. It added that heightened risks related to inflation and balance of payments stem from both global and domestic factors. Furthermore, it said that elevated import prices in Pakistan have contributed to higher-than-expected CPI, Sensitive Price Index (SPI), and core inflation outturns. The central bank also noted emerging signs of demand-side pressures on inflation while saying price growth expectations of businesses have risen.

Governor SBP Reza Baqir in a recent interview with a weekly magazine highlighted international commodity prices, domestic demand growth, and the exchange rate as three drivers of inflation in the country. The rupee has lost about 14.6 percent of its value against the US dollar since April 1. (It sank to 175.72 a dollar on November 30 from 153.30 on April 01).

Global Inflationary Pressures

The annual rate of inflation in the United States in October 2021 was the highest in more than three decades. Similarly, inflation in France hit its highest level in 13 years in November 2021. Canada’s annual inflation rate in October also matched an 18-year high. The trend is even more widespread, according to an analysis by Pew Research Center. Data from 46 nations (that covers the 38 Organization for Economic Cooperation and Development (OECD) member nations and eight other economically significant countries) found that the third-quarter 2021 inflation rate in 39 of them was higher than the third quarter of 2019.

In the 12 months till November 2021, the Bloomberg Commodity index, Brent and West Texas Intermediate (WTI) crude oil futures have logged gains in all months, except three.

The OECD Economic Outlook report for December 2021 said that the surge in demand for goods since economies reopened and the failure of supply to keep pace have generated bottlenecks in production chains. It added, “labor shortages, pandemic-related closures, rising energy and commodity prices, and a scarcity of some key materials are all holding back growth and adding to cost pressures.” The report also noted that imbalances in the energy market are a key factor driving up inflation in all economies.

How Pakistan Fares in the Region?

But there’s a flip side, and a rather damning one. According to data by Bloomberg, Pakistan is home to the fastest inflation pace among 12 Asian countries. China, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan, Thailand, Vietnam and even India all have lower inflation than Pakistan.

Future Course, With Omicron in Focus

Right now, there is a great deal of uncertainty, primarily due to the emergence of the Omicron variant. The OECD has warned that the new strain can intensify imbalances that are slowing growth and pushing costs higher.

On the other hand, oil prices saw their biggest one-day fall since the start of the pandemic last week due to fears surrounding the impact of Omicron variant of COVID-19 on energy demand as the new variant’s international spread continued. On December 2, OPEC and its allies agreed to stick to their existing policy of monthly oil output increases in a much-awaited decision. In a statement, the group said, “Today’s meeting will remain in session pending further developments of the pandemic.”

Lower oil prices are likely to offer Pakistan much-needed breathing space. The slump in oil prices has allowed the government to increase the rates of petroleum levy and general sales tax (GST), in line with commitments made with the IMF despite keeping prices unchanged. But with multiple factors at play, the inflation outlook remains elusive.

Source: Pro Pakistani

Category: Business