Fifth year of double digit inflation

Inflation is one of the key indicators of a country that provides an important insight on the state of the economy and policies that govern it. A stable inflation not only provides impetus for economic growth, but also uplifts vulnerable strata’s of the society. In this regard, Pakistan in recent years has been in grip of high inflation which amongst other things has adversely affected the economic health of the country.

In last 4 years average yearly inflation stood at 14.6% as against an average GDP growth rate of a mere 2.9%. The overall CPI has risen by 76% in last four years thereby eroding the purchasing power of the masses as the overall economy has not performed in line with mounting prices.

Furthermore, with inflation forecasted to stay in double digit in FY12, it would be the first time in Pakistan history that we will observe consecutive 5 years of double digit inflation.

Energy shortages and rising commodity prices

Structural weakness arising from energy shortage, along with hike in the international commodity prices (particularly oil) stand out as the major reason behind Pakistan’s high inflationary period. In addition, upward adjustment in the electricity tariffs, PKR devaluation against the greenback (average annual 4 year devaluation of 9.3%) and access government borrowing from the SBP (which stood at Rs3.0tn at the end of FY11) also lend their hand in creating inflationary pressures.

Considering this as monetization phenomena, the central bank opted for a vigilant approach and keeps the policy rate at elevated levels so to rope in the overall aggregate demand. Thus coupled with structural weakness has resulted in 4-year GDP growth rate to slow down at a time when South Asian economies are booming.

CPI inflation likely to stand around 12% in FY12

FY12 would be another year of double digit inflation on the back of higher commodity prices, particularly international crude oil and food products. These contribute approx. 50% to CPI basket and have been the major culprit behind the recent inflationary pressure. Food inflation stood at an average 14.6% in last 4-years, while oil related inflation stood at an average 13.7% in the same period.

The impact of commodity price hike would be further augmented by structural weakness arising from power/energy shortage and weakness in the supply chain. In addition to commodity price hike, fiscal indiscipline poses another major threat to the inflation number. Escalating fiscal deficit from the envisioned target of 4.0% of GDP (Rs950bn) would render into access government borrowing from the banking channels as external inflows has been affected due to uncertain security situation in the country. This in turn could render into re-emergence of monetary overhang and thus, fuel inflationary pressure going forward.

Overall, we expect average FY12 inflation to clock at 12% which is also the projection of the government. After Ramadan YoY CPI may touch 11% due to high base affect. However with full year inflation likely to remain in double digit once again, Pakistan will see for the fist time fifth -consecutive years of double digit inflation. Thanks for Topline