The federal government has announced a significant reduction in its inflation rate forecast for August 2024, projecting it to fall into single digits. This adjustment places additional pressure on the central bank to implement a steep interest rate reduction at the upcoming monetary policy meeting.
According to the Ministry of Finance’s monthly economic outlook, inflation rate is expected to stabilize between 9.5% and 10.5% in August, with further declines anticipated to reach 9% to 10% in September 2024. This forecast is notably lower than last month’s prediction of 11% for August provided by the finance ministry’s economic advisory wing.
The central bank’s monetary policy committee is set to convene on 12 Â September 2024 to determine the policy rate for the next two months. It faces criticism for its gradual approach to reducing interest rates despite a marked slowdown in the inflation rate. The last policy rate was set at 19.5%, but sources indicate that Finance Minister Muhammad Aurangzeb and military leadership are dissatisfied with the cautious stance, arguing that it hinders economic growth and strains fiscal accounts.
The finance ministry has allocated Rs9.8 trillion for interest payments in the current fiscal year, anticipating an average interest cost of 18%. However, State Bank of Pakistan (SBP) Governor Jameel Ahmad clarified during a parliamentary committee meeting that the actual interest cost should be adjusted to reflect a profit of Rs2.5 trillion that the central bank will remit to the federal government this fiscal year.
The finance ministry’s report emphasizes that the easing monetary policy is a response to declining inflationary pressures. During the first month of FY25, the money supply (M2) decreased by 3.2%, a sharper decline compared to the previous year. This adjustment aims to maintain anchored inflationary expectations and support sustainable economic recovery throughout the year.
The ministry also highlighted that Pakistan’s economy began the current fiscal year with positive developments, creating an optimistic outlook for the coming months. A decrease in CPI inflation last month further suggests that the economy is on track to achieve single-digit inflation in the near future. Improved management in both fiscal and external sectors has demonstrated resilience, with the current account showing improvements and tax collection exceeding targets in July 2024.
While inflation was recorded at 11.1% in July year-on-year, it increased by 2.1% month-on-month, driven largely by budgetary measures that inflated the cost of essential goods. The finance ministry remains hopeful that large-scale manufacturing will continue its positive growth trajectory this fiscal year, supported by improved external demand, a stable exchange rate, declining inflation, and easing monetary policy.
However, the agricultural outlook for Kharif 2024 will largely depend on crop-specific weather patterns, which will significantly impact crop yields. Recent rainfall can have both positive and negative effects on the crops of rice, sugarcane, cotton, fodder, and vegetables if excessive rain does not damage farmland.
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Urea offtake during Kharif 2024 (April-July) was reported to be 13.5% lower than in Kharif 2023, while di-ammonium phosphate (DAP) offtake rose by 8.2%.
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On the external front, the ministry noted an upward trend in exports, imports, and workers’ remittances. August 2024 is expected to see exports ranging between $2.5 billion and $3.2 billion, imports between $4.5 billion and $5 billion, and remittances estimated at $2.6 billion to $3.3 billion.
