The new agreement that was reached with the International Monetary Fund (IMF) ought to play a significant part in maintaining the stability of forex reserves and have a favorable effect on the Pakistani Rupee (PKR).
While this would be beneficial for Pakistan, a report that was compiled by Arif Habib Limited (AHL) estimates that the measures taken by the government will possibly result in higher inflation and further tightening of the monetary policy. While this would be beneficial for Pakistan, Arif Habib Limited (AHL) estimates that this will lead to further tightening of the monetary policy.
Doha, Qatar, was the location of a recent meeting between Pakistani government officials and members of the International Monetary Fund (IMF). The purpose of the meeting was to discuss the seventh review of the lender’s Extended Fund Facility (EFF). Regarding this matter, the International Monetary Fund (IMF) issued a short statement in which it appreciated the significant progress achieved by Pakistan and welcomed the recent policy rate increase. Nevertheless, the agency expressed its worries over the policy deviations made on the budgetary front, which included the announcement of subsidies back in February 2022.
At the end of the statement, an emphasis was placed on the need for corrective and tangible policy measures to be taken in order to attain the programme goals. After this, the government made the decision to partially reverse the subsidy package that had been placed on petroleum products. In response, they increased the price of MS, HSD, Kerosene, and LDO by Rs. 30 per liter. This brought the price of a liter of each of these products to Rs. 179.86, Rs. 174.15, and Rs. 155.56, respectively. In this analysis, the AHL report has underlined the possible effect that this move might have on the economy as a whole, with a particular emphasis on inflation and the arrangement with the IMF.
The drums keep on beating as Pakistan’s inflation rates continue to climb ever-so-slightly higher with each passing month. In comparison, the year-over-year inflation rate for SPLY is 8.62 percent, while the average inflation rate for 10MFY22 is 11.04 percent.
The Food and Transport indices have been the primary drivers of this YoY increase so far; the Food index has increased by 17 percent YoY while the Transport index has increased by 28 percent YoY. Because of recent changes, such as the partial reversal of the gasoline subsidy and a lack of wheat, it does not seem like inflation will be going down anytime soon. The substantial increase in the price of petroleum that occurred when the subsidy was reversed will be the primary driver of inflationary pressure in the months to come. According to the report’s predictions, the only influence that this reversal will have on the headline figure in June 2022 will be around 1.2 percent.
It is pertinent to mention here that in the most recent Monetary Policy Statement (MPS), the SBP highlighted the need for urgent fiscal consolidation, to help relieve pressure on inflation, market rates, and external account, by rolling back the subsidy package, while providing adequate and targeted social protection to the most vulnerable. It is important to note that this was done in order to help relieve pressure on inflation, market rates, and the external account.
Due to the fact that there is an inadequate inventory position of wheat, the government has resorted to the practice of importing it in order to satisfy the present demand and ultimately develop a buffer stock for the months ahead. In addition, thus far in the current financial year 2021-22, Pakistan has imported palm oil to the value of $2.79 billion. This makes palm oil the primary component of Pakistan’s food group imports. According to the research, the price of palm oil on the worldwide market rose by 72% over the reporting period, going from $912/mt to $1,571/mt.
In addition, the prices of tomatoes, onions, potatoes, milk, rice, and fresh vegetables, as well as the majority of the food products that are classified as “essentials,” are not very sensitive to changes in market conditions. This indicates that their demand will not change even if prices go up, which will contribute to inflation caused by supply-side forces. When all is considered, it is possible that the headline statistics of inflation may take a pause in the second half of CY22 due to the large base effect coming into play. Having said that, the likelihood of relaxation of monetary policy in the latter half of FY23 might be a possibility if the authorities continue to take steps to curb inflationary pressures. This could happen in the event that the authorities continue to take measures.