Rising food prices curtail purchasing power: WB

Published April 27, 2022
KARACHI: People buy greens from a stall in Saddar area. The prices of consumer goods rose 12.7 per cent in March from 12.2pc the previous month driven by a record rise in energy and food rates.—Fahim Siddiqi/White Star
KARACHI: People buy greens from a stall in Saddar area. The prices of consumer goods rose 12.7 per cent in March from 12.2pc the previous month driven by a record rise in energy and food rates.—Fahim Siddiqi/White Star

ISLAMABAD: The World Bank says rising food and energy inflation in Pakistan is expected to diminish the real purchasing power of households, disproportionately affecting poor and vulnerable households that spend a larger share of their budget on these items.

In its Macro Poverty Outlook for Pakistan report, the World Bank says political tensions and policy slippages can also lead to protracted macroeconomic imbalances. Macroeconomic risks are strongly tilted to the downside.

They include faster-than-expected tightening of global financing conditions, further increases in world energy prices, and the possible risk of a return of stringent Covid-19-related mobility restrictions, the report says.

Inflation is estimated to rise to 10.2 per cent in fiscal year 2022 but moderate over the forecast horizon. Largely reflecting the imports surge in first half of 2022, the current account deficit is expected to widen to 4.4 per cent of the GDP in fiscal year 2022.

Political tensions, policy slippages can also lead to protracted macroeconomic imbalances

Macroeconomic adjustment measures and the weaker currency are expected to tame imports mostly in 2023 fiscal year. The current account deficit is expected to narrow to 3.0 per cent of the GDP in fiscal year 2024, as reforms to reduce import tariffs and the anti-export bias of trade policy gain traction.

The fiscal deficit including grants is projected to widen slightly to 6.2 per cent of the GDP in fiscal year 2022, and gradually narrow over the medium term as revenue mobilisation measures, particularly GST harmonisation and personal income tax reform, take hold.

Public debt as a share of the GDP is projected to stay high, but to gradually decline over the medium-term. The outlook is predicted on the IMF-EFF programme remaining on-track.

On the back of high base effects, recent macroeconomic adjustment measures and stronger inflation, the real GDP growth is expected to slow to 4.3 per cent in fiscal year 2022 and to 4.0 per cent in fiscal year 2023. However, thereafter, economic growth is projected to recover to 4.2 per cent in fiscal year 2024, supported by the implementation of structural reforms to support macroeconomic stability and dissipating global inflationary pressures

The report warned that long-standing structural weaknesses of the economy and low productivity growth pose risks to a sustained recovery. Strong aggregate demand pressures, in part due to previously accommodative fiscal and monetary policies, paired with the continued less conducive external environment for exports have contributed to a record-high trade deficit, weighing on the rupee and the country’s external buffers.

The report says that headline inflation rose to an average of 9.8 per cent year-on-year in the first half of fiscal year 2022 from 8.6 per cent in the first half of fiscal year 2021, driven by surging global commodity prices and a weaker exchange rate. Similarly, core inflation has been increasing since September 2021.

Accordingly, the State Bank has been unwinding its expansionary monetary stance since September 2021, raising the policy rate by a cumulative 275 basis points and banks’ cash reserve requirement by 100 basis points.

Published in Dawn, April 27th, 2022

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