FeaturedNationalVOLUME 17 ISSUE # 12

Contrasting claims about inflation

Recently, Prime Minister Imran Khan and ministers claimed inflation would come down in three months. However, Finance Minister Shaukat Tarin belied their assertions and feared that prices would not reduce in a few months. The contrasting claims about inflation show the common people should not expect relief from high prices in the near future.

International institutions have also warned that inflation would remain high in both advanced and developing economies. In this situation, Pakistanis cannot expect relief even in the fourth year of the government of Prime Minister Imran Khan. Hoarding and profiteering have continued unchecked in the present government and COVID-19 worsened the situation. The common people have lost trust in the government, which looks helpless before profiteers and hoarders. The pity is that the government has left people at their mercy and does not even bother to take cosmetic measures. Prices would increase after months and years in past governments, but they jump now almost daily and vary from shopkeeper to shopkeeper and market to market.

Inflation rose to 12.3pc in December from 11.5pc the previous month, which was the largest hike in nearly two years. The Pakistan Bureau of Statistics (PBS) data said inflation, measured by the Consumer Price Index (CPI), had increased to its highest level in 21 months. According to the State Bank of Pakistan (SBP), recent policy measures have improved the inflation outlook as current real interest rates on a forward-looking basis are appropriate to guide inflation to the medium-term range of 5-7pc, support growth, and maintain external stability. It expects inflation to remain high during the current fiscal year but says it will be within range. However, inflation is expected to be lower in next year (FY23) than (FY22), it said.

It noted that headline and core inflation had risen in December as both sequential momentum of inflation and inflation expectations of businesses fell significantly. Together with low base effects, one-off cost-push pressures from energy tariff increases and the removal of tax exemptions in the Finance (Supplementary) Act are likely to keep year-on-year inflation elevated over the next few months, close to the upper end of the average inflation forecast of 9-11pc in FY22. However, during FY23, inflation is expected to decline toward the medium-term target range of 5-7pc more quickly than previously forecasted as demand-side pressures wane faster due to the Finance (Supplementary) Act and recent moderation in economic activity indicators, the central bank noted.

According to the SBP, overall growth in FY22 is expected around the middle of the forecast range of 4-5pc, slightly lower than previous expectations in the light of moderating demand indicators and higher base effects from the upward revision in last year’s growth rate. Risks to the outlook include, on the domestic front, the current growing Omicron wave and, on the external front, the possibility of faster than anticipated tightening by the US Federal Reserve and geopolitical events in Europe that may have implications for global financial conditions.

The International Monetary Fund (IMF) has also cautioned that the emergence of new COVID-19 variants could prolong the pandemic and induce renewed economic disruptions, while supply chain disruptions, energy price volatility, and localized wage pressures posed further risks. It revised up its 2022 inflation forecasts for both advanced and developing economies and feared elevated price pressures were likely to persist longer than previously forecast given ongoing supply chain disruptions and high energy prices. It said inflation was expected to average 3.9pc in advanced economies and 5.9pc in emerging market and developing economies in 2022 before subsiding in 2023, aided by moderated growth in fuel and food prices over that period. While economies continue to recover from the shock of the pandemic, the IMF sees the pace of the recoveries diverging widely between rich and poorer countries. In its latest report, it also lowered its economic forecasts for the United States, China and the global economy, and said uncertainty about the pandemic, inflation, supply disruptions and US monetary tightening posed further risks. “We project global growth this year at 4.4pc, 0.5 percentage point lower than previously forecast, mainly because of downgrades for the United States and China,” Gita Gopinath, the IMF’s No. 2 official, wrote in a blog on the latest update of the World Economic Outlook. The IMF said the rapid spread of the Omicron variant had led to renewed mobility restrictions in many countries and increased labour shortages, while supply disruptions were fueling inflation. Omicron was expected to weigh on economic activity in the first quarter, but ease up thereafter, given that it was associated with less severe illness, the IMF said.

Global growth is expected to slow to 3.8pc in 2023, a 0.2 percentage-point uptick from the previous forecast in October, but the increase was largely mechanical after current drags on growth dissipate in the second half of 2022. Overall, the pandemic is now projected to result in cumulative economic losses of $13.8 trillion through 2024, compared to the previous forecast of $12.5 trillion. The IMF cut its forecast for US growth by 1.2 percentage points given the failure of US President Joe Biden to pass a massive social and climate spending package, earlier tightening of US monetary policy and continued supply shortages.

Against tall government claims, the Asian Development Bank (ADB) has also forecast higher than estimated inflation in Pakistan, mainly because of increase in energy rates and higher domestic commodity prices due to higher global commodity prices. In its Asian Development Outlook (ADO) Supplement, the lending agency also lowered the economic growth forecast for South Asia to 8.6pc, from its earlier projection of 8.8pc, and increased the inflation forecast to 5.9pc, up from 5.8pc rate of inflation it had earlier estimated for the current year. “Much of the forecast upgrade reflects a higher projection for Pakistan, where adjustments to energy tariffs and higher global commodity prices are expected to exert upward pressure on domestic prices,” it added.

The government claims reducing prices is its priority. Prime Minister Imran says high inflation and its effects on the common people keep him awake at night. However, continued inaction of his government belies his seriousness.