Inflation remains a formidable challenge for the PTI government. In six-and-a-half months of the current fiscal year, all economic indicators signal growth in inflationary buildup. Even fiscal and monetary tightening have not helped matters.

The latest State Bank of Pakistan (SBP) data shows that between July 1 and Jan 14 2021-22, reserve money grew 2.79 per cent against 1.19pc last year. Significantly, the State Bank of Pakistan indicated in its latest monetary policy statement that inflation during the current fiscal year would remain close to 11pc against 8.9pc in the last year. However, due to the mini-budget which will curb demand, experts expect some easing of inflation in the next fiscal year beginning in July.

In the opinion of the State Bank of Pakistan, the demand side inflationary pressures are already waning faster after the recent fiscal measures validated through the Finance (Supplementary) Act— “and recent moderation in economic activity indicators.” The most glaring example of this moderation is the decline in large-scale manufacturing (LSM). Year-on-year LSM output growth slowed down to 0.3pc in November 2021, from 13.8pc in November 2020. LSM production in July-Nov 2021-22 also slumped to 3.26pc from 6.85pc in July-Nov FY21, according to the latest update of the Pakistan Bureau of Statistics.

It is relevant to add here that on Jan 24, the State Bank of Pakistan decided to keep the interest rate on hold at 9.75pc till the review of its monetary policy due on March 8. The central bank said its decision was “in line with the forward guidance provided in the last monetary policy.” While hiking its key policy rate from 8.75pc to 9.75pc on Dec 14, the State Bank of Pakistan stated that “due to recent higher than expected outturns,” it expects inflation to average 9-11pc this fiscal year.

By keeping its policy rate unchanged the central bank signalled to the markets that limiting inflation within 9-11pc does not require further monetary tightening at this stage. The State Bank of Pakistan’s monetary policy committee is scheduled to meet again on March 8 to review its policy.

It may be recalled that in October last year, national average consumer inflation had risen to 9.2pc year-on-year — breaching the central bank’s previous estimate of 7-9pc. This happened despite a nominal increase of 25 basis points in the central banks’ policy rate — from 7pc to 7.25pc announced on September 19. Growing aggregate demand — supported by the government’s fiscal stimuli and the central bank’s own post-COVID economic support credit programmes — easily absorbed this moderate hike in the interest rate. And, year-on-year inflation first rose to 11.5pc in November and then to 12.3pc in December.

Between November and December, the State Bank of Pakistan administered a double dose of monetary tightening to the economy — taking its policy rate from 7.25pc to 8.75pc on Nov 19 and then to 9.75pc on Dec 14. The hefty 250bps rise in interest rates announced in less than a month was aimed at dampening domestic demand, thereby affecting the demand-pull part of inflation, which is also capable of decelerating demand for imported goods, thus containing imported inflation. These two factors, put together, are expected to keep inflation “closer to the upper end” of the revised estimate of 9-11pc, according to the State Bank of Pakistan’s monetary policy statement.

Containing inflation in this range is now possible because monetary policy tightening is accompanied by the imposition of higher cash reserves requirement for banks, regulatory tightening of consumer finance, and curtailment of non-essential imports.

In Nov last year, the State Bank of Pakistan had raised cash reserve ratio (CRR) for banks (to maintain for two weeks) from 5pc to 6pc and from 3pc to 4pc to maintain each day. But what diluted the impact of this measure on a net basis was that the central bank continued injecting huge funds into the interbank money market to keep them liquid enough ahead of the scheduled auctions of the government treasury bills and bonds. Earlier on Sept 23, just four days after a nominal interest rate hike of only 25bps, the State Bank of Pakistan had made the rules stricter for banks in regard to offering auto finance, personal loans. It was an important step and could have led to a real dampening of domestic demand had it come alongside a sharper increase in the interest rate.

The measures taken for the curtailment of non-essential imports are sure to contribute to the easing of inflation in the months ahead. These measures include the imposition of higher regulatory/import duties and increased general sales tax as well as the requirement of high cash margins at the time of opening of letters of credit.

But the downside is that there is a strong likelihood of international oil prices remaining high. Further, if gas shortages persist, more natural gas will need to be imported. The food import bill may also swell on the back of higher global prices of food commodities. Surely, if inflation is to be controlled, the government will have to drastically curtail the import of food items as well as all luxury imports, such as fancy cars and other expensive toys loved by our pampered elite class.