Global price pressures could spike inflation

Published September 29, 2021
A vendor sprays water on vegetables at a stall in Islamabad. — Reuters
A vendor sprays water on vegetables at a stall in Islamabad. — Reuters

ISLAMABAD: The Economic Adviser’s Wing of the Finance Ministry has warned that higher international commodity prices, particularly those of food and energy, could increase inflation and has called for structural policies to improve functioning of markets to ease inflationary pressures.

“The risks that could raise inflation include higher trend in global commodity prices, especially food and energy items,” said the Economic Adviser’s Wing in its Monthly Economic Update & Outlook (MEUO) for September.

The report said the revival of economic activities all over the world had increased the prices of commodities unprecedentedly and Pakistan was the country in which imports are mostly related to growth-oriented capital goods. “The revival of economic activities domestically has increased the import bill mainly due to an increase in raw materials for consumer and capital goods especially in last three months,” it said.

The substantial rise in international commodity prices is the major reason of increase in our import bills, which has put pressure on the rupee. Further, changing geopolitical situation is also building pressure on domestic production and the money market. Pakistan’s inflation rate is mainly driven by the demand factors as well as international commodity prices, exchange rate, seasonal factors and economic agents’ expectations concerning the future developments of these indicators.

The report said Pakistan’s economy was currently on a higher growth path and it was important that this growth was driven by the expansion of domestic production for long-term enhancement and sustainability. “Attaining sustainable higher growth path requires a much larger proportion of the value added to be directed towards gross fixed capital formation, instead of consumption. This can be managed by appropriate long-term structural policies.

In the short-term, sustainability of the current growth requires that the trade deficit remains manageable. In this regard, import dynamics are being closely monitored. Exports can benefit from the current domestic and foreign economic dynamism. Maintaining REER (real effective exchange rate) at current level, the need for depreciation of the rupee exchange rate is reduced significantly. The government policies for export promotion will also anchor for providing external sector stability.

The report said the Cotton Crop Assessment Committee had estimated the overall production to reach to 8.5 million bales during FY22 showing an increase of 20pc compared to 7.1m bales last year.

In July, LSM witnessed a modest increase of 2.3pc against 8.1pc in July 2020. LSM performance remained sluggish temporarily due to closure of industrial activities during holidays in Eidul Azha and monsoon rain which spread over 15 days. The MEUO said the latest upward trend of other high frequency variables such as car production and sales, oil sales, cement dispatches etc. will boost the LSM in coming months.

The report said the exports of goods and services for next month will remain above $3 billion and remittances likely to keep momentum, consequently current account deficit will be in manageable range.

Published in Dawn, September 29th, 2021

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