Inflation falls sharply, undercuts tight policy

Express Tribune

14 hours ago

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The government has surpassed its annual inflation target, which increased at a pace of 4.5% in the last fiscal year, mainly because of a slump in food prices, reinforcing the widely held independent view that the extent of monetary tightening was excessive and unwarranted.
The Pakistan Bureau of Statistics (PBS) reported on Tuesday that the average increase in the cost of a basket of essential goods and services stood at 4.5% for FY2024-25 — well below the official target of 12% and far lower than initial projections by the International Monetary Fund (IMF) and other multilateral lenders.
The IMF had initially forecast inflation at 15%, later revising it downwards. However, these elevated projections pressured the central bank to maintain double-digit interest rates, which ultimately hurt economic growth.
The central bank has kept the interest rates at 11%, which are far higher than the headline and average inflation rates for the just ended fiscal year. This solely benefited the commercial banks at the expense of businesses and the federal government that gives away around half of the total budget in interest payments.
The current approach of maintaining 11% rates, while allocating Rs7.2 trillion for domestic debt servicing, ensures continued economic stagnation, whereas regional competitors strengthen their industrial bases and export capabilities, according to the Economic Policy and Business Development (EPBD).
The government has allocated a total Rs8.2 trillion for debt servicing, which is equal to 46% of the approved budget for this fiscal year, which began on Tuesday.
The EPBD, an independent think tank, stated last week that the Rs7.2 trillion was going to the banking sector as guaranteed profits. With 59% of government debt in floating-rate instruments, reducing policy rates from 11% to 6% would generate immediate savings on the majority of debt stock, it added.
It further said that the government compounded this burden by issuing Rs2 trillion in fixed Pakistan Investment Bonds at peak rates of 22% during the last two fiscal years and locked in excessive costs for banks' benefit, according to the statement.
The think tank stated that by reducing the interest rates to 6% because of substantial reduction in the inflation rates, the government can immediately save Rs3 trillion in the debt cost. Even a small portion of these savings can help generate jobs by lowering the cost of doing business, according to EPBD.
The average inflation rate in rural areas remained at 3.3%, while it ended at 5.3% in the urban centres, according to the PBS.
The annual inflation rate also eased to 3.2% in June, which was in line with the Finance Ministry's projection for the month. In its monthly economic outlook report, the ministry reported this week that the inflation was projected to remain between 3-4% in June.
With the fresh inflation rate, the gap between headline inflation and the key policy rate of the SBP has widened to 7.8%. The Monetary Policy Committee last month left the policy rate unchanged 11% despite a persistent decline in inflation.
For the new fiscal year, the government has approved a 7.5% inflation target, which still provides further room for reducing the interest rates.
Core inflation, calculated after excluding energy and food items, has eased both in cities and towns. The rate slowed down to 6.9% in cities and 8.6% in rural areas, said the PBS. Urban annual inflation eased to 3% and it slightly accelerated to 3.6% in rural areas last month.
The PBS reports inflation data from 35 cities and covers 356 consumer items. In rural areas, it covers 27 centres and 244 consumer items. The data showed that food prices again decelerated after picking up pace a month earlier. The food inflation rate in cities slowed down 4.2% but slightly increased to 2.4% in rural areas.
The government has failed to fulfil its promise of keeping the prices of sugar in check, thanks to the decision of allowing exports last year. Sugar prices jumped one-fourth last month compared to a year ago, according to the PBS.
The increase in sugar prices is also contributing to higher tax collection, as the government has linked the 18% sales tax on sugar with the fortnightly inflation rate.
Eggs became expensive by 25%, milk powder 22% and meat 11%. Onion prices were still lower by 56% compared to a year ago, followed by 23% reduction in prices of tomatoes and wheat 17%. Electricity charges were lower by 30% last month, compared to a year, petrol was still 2% cheaper than last year despite increasing taxes.