ISLAMABAD: The finance ministry on Wednesday forecast inflation to surge by 3-4 percentage points to 31 per cent in September compared to 27.4pc in the preceding month mainly because of a major increase in fuel prices.

Inflation was likely to ease due to the double-digit base effect in September, but the significant rise in fuel prices offset it, said the Economic Advisors’ Wing of the Ministry of Finance in its monthly economic update & outlook for September.

Together with this, the upward adjustment in energy tariffs is further likely to intensify inflationary pressures in the coming months as these price adjustments are expected to place an additional burden on transportation costs, essential items, and services, it further said.

It is expected that inflation will remain in the range of 29pc to 31pc in September.

Inflation has declined to 27.3pc in August, down from peak levels of 38pc in May. The State Bank of Pakistan forecasts inflation to decline sharply in 2024 due to the improved agricultural output, and administrative measures taken to curb volatility in the foreign exchange markets.

SBP has projected 20-22pc average inflation for FY24 from 29.2pc in FY23.

The report highlights a series of actions that the government has already taken and the declining international prices that would help to lower inflation in the coming months.

The report claims that the government’s stern administrative measures to curtail the hoarding of commodities and a crackdown on illegal forex business have resulted in moderating the inflation pressure. However, given the international oil price pressure and adjustment in energy prices, uncertainty in inflation will remain.

The government has launched an operation against illegal forex dealers and commodity hoarders, which has stabilised the exchange rate and reduced commodity prices.

The SBP has left its policy rate unchanged at 22pc saying inflationary expectations are under control. The rupee depreciated by 45pc against the dollar since June 2022 reaching 295 in the interbank market and 304 in the open market in August.

The weak rupee had fuelled the record-high inflation in the past year. To address this issue, the government has taken action against the exchange companies that were involved in speculative activities.

On the other hand, international food prices have been experiencing a decline since August. The Food and Agriculture Organisation (FAO)’s price index, which tracks the most globally traded food commodities, averaged 121.4 points in August against 124.0 for the previous month.

The August figure was the lowest since March 2021 and also 24pc below than an all-time high in March 2022, in the wake of Russia’s invasion of Ukraine. The decline in most of the food commodities is offsetting the increases in rice and sugar.

According to the finance ministry, the main cause of inflation is the structural problems — public debt, energy circular debt and trade deficit. Corrective fiscal action must be taken on an urgent basis to reduce inflation.

For FY24, significant enhancements in budget allocations for social safety nets have been made including cash transfers under BISP.

The government is taking measures to curb inflation and is sparing the public from the full impact of the power and gas tariff hike. It has allocated Rs1 trillion for subsidies in FY24, the ministry said.

Published in Dawn, September 29th, 2023

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