Achi news desk-
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Monitoring desk
Islamabad: Inflation fell to an almost two-year low of 20.7% in March, despite a seasonal outbreak in perishable food products, which exceeded government expectations by a wide margin and put a question mark on the central bank’s policy of maintaining record high interest rates.
The Pakistan Bureau of Statistics (PBS) reported on Monday that the rate of increase in the prices of goods and services remained at 20.7% in March compared to the same month last year. This was the lowest rate in the last 22 months.
It was the second month in a row that the rate of inflation slowed significantly – even much more than the optimistic official forecasts. It was also the third month in a row that the rate of increase remained on a downward trajectory.
Last week, the Ministry of Finance predicted that inflation would remain around 23.5%. The slowdown was more pronounced in urban centers, where the rate of price increase was significantly eased.
The central bank has kept the interest rate at 22%, which is the highest interest rate since 1972 and is not justified because inflation in Pakistan is mainly driven by managed price increases or food supply shocks.
Interest rates are higher than the rate of core inflation, which has significantly increased the cost of government borrowing to a record 8.3 trillion rupees this fiscal year.
The State Bank of Pakistan (SBP) did not cut interest rates in the last Monetary Policy Committee (MPC) meeting despite the path showing a downward trend and core inflation also being relaxed.
The SBP seems to be taking a dictate from the International Monetary Fund (IMF) and not reducing interest rates, which has significantly affected business and the official coffers. The economy grew by just 1% in the second quarter of this fiscal year, while the industrial sector shrank by 0.9%.
The parity between the rupee and the dollar also remains at around 278 rupees due to the central bank’s decision to purchase dollars from the interbank to stabilize foreign exchange balances.
The PBS inflation bulletin showed that the pace is decreasing for both food and energy items, which was further eased in both rural and urban areas. The non-food inflation rate in urban areas slowed to 25.8% and 21% in rural areas.
Electricity, gas, fuel, diesel and transportation costs have kept the non-food inflation rate in the double digits. Gas rates were 318% higher than the previous year and the cost of electricity was almost three quarters more than last year.
Pakistan has also committed to the IMF to raise electricity prices in time. Last week, the National Electricity Regulatory Authority increased electricity prices by 2.76 rupees per unit to recover an additional 100 billion rupees from consumers, including sales tax.
Food inflation slowed in cities and rural areas. In the urban centers it slowed to 16.6% and slightly above 17% in the villages and towns, according to the PBS. People’s purchasing power has been significantly reduced due to constant double-digit increases in the prices of essential and sustainable products.
Successive governments have significantly increased the tax burden. A day earlier, the government had further hiked fuel prices by nearly Rs 10 per liter due to a rise in international markets.
The exchange rate remains stable and it is expected that the rate of inflation may slow down further in the coming months due to a higher base effect. However, the government will miss its annual average inflation target of 21%.
Core inflation, calculated excluding energy and food items, fell to 12.8% in urban areas, the slowest pace in nearly two years. It was recorded at 20% in rural areas. Average core inflation is now significantly lower than interest rates.
The former SBP governor, Dr. Reza Bakir, agreed with the IMF that Pakistan would set the interest rate according to the general inflation rate by delinking it from the core index. There was still a double-digit increase in the prices of all 12 commodity groups, excluding alcoholic beverages and tobacco.
The prices of non-perishable goods increased by 14% but this ratio was over 42% for perishable products. Shop owners raised the prices of fruits and vegetables, taking advantage of the increased demand during the holy month of Ramadan.
There was a significant increase in the prices of tomatoes, onions, potatoes, fresh fruits, vegetables, sugar, wheat flour and flour. But cooking oil prices fell by 22% in one last month.
The government and the central bank are again expected to miss their annual inflation target of 21%. The PBS reported that in the July-March period of the current fiscal year, average inflation remained at 27.1%. This was much higher than the official target of 21% for the current financial year.
