IMF projects in­fla­tion to hit 14% in Pak­istan by June

Gulf Times Business - - BUSINESS -

The In­ter­na­tional Mone­tary Fund (IMF) has pro­jected that the av­er­age in­fla­tion rate in Pak­istan might hit 14% by June next year – a level that if reached could re­sult in in­ter­est rates peak­ing to 15% and econ­omy dras­ti­cally slow­ing down, govern­ment sources say.

Such a high level in­fla­tion would also carry im­pli­ca­tions for Prime Min­is­ter Im­ran Khan’s most am­bi­tious flag­ship pro­gramme of con­struct­ing 5mn low­cost hous­ing units.

The banks lend money over and above the pol­icy rate, which will re­duce the govern­ment’s op­tions to give sub­sidy on hous­ing loans.

The sources said due to sta­bil­i­sa­tion mea­sures, the IMF is also pro­ject­ing eco­nomic growth rate of be­low 3% for fis­cal year 2018-19.

These as­sess­ments were shared with Pak­istan dur­ing Septem­ber 27 to Oc­to­ber 4 staff level visit.

Al­though the IMF has not men­tioned the in­fla­tion pro­jec­tions in its hand­out, it did in­ter­nally share the assess­ment of av­er­age 14% in­fla­tion in fis­cal year 2018-19 with the Fi­nance Min­istry, said sources who ne­go­ti­ated with the IMF.

The is­sue of in­fla­tion and the Gross Do­mes­tic Prod­uct (GDP) also came up for dis­cus­sions dur­ing the clos­ing meet­ing be­tween Fi­nance Min­is­ter Asad Umar and IMF team.

The meet­ing was held in Q-Block on last Thurs­day.

In its hand­out is­sued on the same day, the IMF un­der­lined that “eco­nomic growth will likely slow sig­nif­i­cantly, and in­fla­tion will rise”.

The av­er­age in­fla­tion in the first quar­ter of this fis­cal year was 5.86%, ac­cord­ing to the Pak­istan Bu­reau of Sta­tis­tics (PBS). The Sen­si­tive Price In­dex-based in­fla­tion has al­ready jumped to 6.5% this week over the same time of the last year, ac­cord­ing to the PBS. The State Bank of Pak­istan (SBP) has also raised its av­er­age in­fla­tion pro­jec­tion to 8% but it is still far lower than the IMF’s assess­ment.

The sources said the IMF’s assess­ment of av­er­age 14% in­fla­tion was based on at least four as­sump­tions.

These were in­crease in prices of gas (al­ready no­ti­fied up to 143%), in­crease in power tar­iffs, de­val­u­a­tion of ru­pee against the US dol­lar that will af­fect al­most ev­ery con­sum­able item and in­crease in prices of petroleum prod­ucts due to de­val­u­a­tion and global crude oil prices.

“Ac­cord­ing to our model, the av­er­age in­fla­tion in the fis­cal year 2018-19 will be be­tween 13% and 15%,” said Dr Hafiz Pasha, for­mer fi­nance min­is­ter, while af­firm­ing the IMF’s as­sump­tions for higher in­fla­tion.

Once the in­fla­tion hits the roof, it would be im­pos­si­ble for the SBP to keep the real in­ter­est rates neg­a­tive.

In such a sce­nario, the IMF would push Pak­istan to hike the key in­ter­est rates to a level, which should be slightly higher than the in­fla­tion lev­els.

The IMF has al­ready an­nounced to send its team to Pak­istan in the com­ing weeks af­ter Fi­nance Min­is­ter Asad Umar for­mally re­quested the IMF man­ag­ing di­rec­tor for a bailout pack­age.

The SBP has re­cently in­creased the in­ter­est rates to 8.5%.

The sources said the IMF de­manded 12.5% in­ter­est rate in the short-term.

The IMF has long been ad­vo­cat­ing tight mone­tary and fis­cal poli­cies to cut the ag­gre­gate de­mand aimed at restor­ing macroe­co­nomic sta­bil­ity in Pak­istan.

The coun­try booked $18bn cur­rent ac­count deficit in the last fis­cal year but its of­fi­cial for­eign cur­rency re­serves are not suf­fi­cient to fi­nance the deficit.

The SBP’s of­fi­cial for­eign cur­rency re­serves de­creased to $8.3bn – hardly suf­fi­cient to give cover to 1.5 months im­ports.

The month of Novem­ber will be crit­i­cal, as the au­thor­i­ties are ex­pect­ing that the cur­rent ac­count deficit will start nar­row­ing down, im­ports will be dras­ti­cally cur­tailed due to pre­vi­ous rounds of de­val­u­a­tion and the ex­ports will pick up.

In case this does not hap­pen, the SBP might be asked to take the in­ter­est rates to dou­ble dig­its and let the ru­pee fur­ther de­value.

The sources said the due to the sta­bil­i­sa­tion mea­sures the IMF has also pro­jected eco­nomic growth rate of be­low 3% as against 5.8% in the last fis- cal year. A se­nior of­fi­cial of the Fi­nance Min­istry, who was also in­volved in ne­go­ti­a­tions with the IMF, said Pak­istan did not agree to the IMF’s assess­ment of 14 per cent in­fla­tion and be­low 3% eco­nomic growth rate.

But Dr Pasha said in ad­di­tion to sta­bil­i­sa­tion mea­sures, the out­put of ma­jor crops would be a de­ter­min­ing fac­tor in es­ti­mat­ing eco­nomic growth rate.

He said if the ma­jor crops out­put dipped, the eco­nomic growth rate will be in the range of 3.2% to 3.5%. “If the agri­cul­ture sec­tor per­forms well, the eco­nomic growth rate could be around 4.2%,” said Dr Pasha.

The IMF’s lat­est World Eco­nomic Out­look re­port said the macroe­co­nomic sta­bil­ity gains in Pak­istan have been erod­ing, putting the out­look at risk.

The eco­nomic growth rate is ex­pected to mod­er­ate to 4% in 2019, and slow to about 3% by 2023.

This sug­gests that Pak­istan’s eco­nomic con­di­tions will re­main pre­car­i­ous for years to come, con­trary to the PM’s prom­ise with the na­tion that he would over­power the sit­u­a­tion in six months.

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