KARACHI: The latest trade and inflation data has fostered a renewed sense of optimism among financial markets, researchers and bankers, sparking expectations of potential monetary easing and economic growth acceleration.

The trade deficit shrank by 30 per cent during the first eight months (July to February) of the current fiscal year, while inflation unexpectedly fell by a significant margin from 28.3pc in January to 23.1pc in February.

“With the trade deficit clocking in at $1.7 billion, we can expect a current account surplus of $100 million to $150 million in February,” said Tahir Abbas, head of research at Arif Habib Ltd.

“The State Bank may potentially start a monetary easing cycle from March onwards with the inflation slowing down and core inflation hitting a 13-month low,” Mr Abbas said, adding that the latest Consumer Price Index (CPI)-based inflation reading includes recent gas tariff revision alongside hikes in petroleum prices. “We believe that inflation will continue its downward trajectory,” he said.

The significant decline in inflation in February has provided policymakers with enough space to ease the monetary policy. The State Bank has kept the interest rate at 22pc to counter high inflation during the current fiscal year.

“There could be many reasons behind the low inflation number, but one thing is very obvious that diminished uncertainties and bold economic decisions of the current dispensation discouraged hoarders and speculators,” Rashid Masood Alam, a senior banker, said, referring to the caretaker government.

“Fiscal-side improvements also resulted in incr­eased confidence, thou­gh hike in power, gas and petrol prices might push it back,” Mr Alam said.

During the July-February period, the trade deficit was $14.9bn compared to $21.3bn a year ago, a year-on-year decline of $6.4bn. This was considered a great relief for the economy struggling to pay back the huge external debt servicing of about $25bn this fiscal year.

The country also benefited from an increase in exports, which jumped 9pc year-on-year to $20.35bn during July-February.

Researchers find the situation helpful for the economy, provided the trend persists for a more extended period.

“It is good for the country that exports are going up and inflation is coming down,” said Samiullah Tariq, head of research at Pak-Kuwait Investment and Development Company.

As for inflation, the base effect was also at play, and the impact of the increase in utility prices was diluting, he said, adding that agriculture exports were supporting the overall exports on the trade side.

However, researchers and bankers were not sure that the latest data would also improve the current account balance. They believed that the 9pc increase in exports was good for the economy but was not the solution for the heavily indebted country.

Similarly, some experts did not find the 23.1pc inflation helpful for an economy facing serious problems of economic growth. Last year’s negative economic growth and this year’s expected growth rate of 2pc were considered highly disappointing for the economy of 240 million population.

Published in Dawn, March 2nd, 2024