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The federal government reduced its inflation forecast for August to a single digit on Friday, which could compel the central bank to consider a significant interest rate cut in the next monetary policy meeting. The Ministry of Finance’s monthly economic outlook projects inflation to range between 9.5% and 10.5% in August, with a further decline anticipated to 9% to 10% in September.
Revised Inflation Forecast and Implications
The latest forecast shows a reduction from the previous 11% inflation projection for August, which was provided last month by the economic advisory wing of the finance ministry. The State Bank of Pakistan (SBP) is scheduled to hold its monetary policy committee meeting on September 12, where it will determine the policy rate for the following two months.
Despite the evident easing of inflationary pressures, the SBP has faced criticism for its cautious approach in lowering the interest rate, which currently stands at 19.5% as decided in the last meeting. Sources reveal that Finance Minister Muhammad Aurangzeb and the military leadership have expressed dissatisfaction with this gradual stance, citing concerns over slowed economic growth and increasing fiscal challenges.
Fiscal Implications and Interest Rate Concerns
The government has earmarked Rs9.8 trillion for interest payments in the current fiscal year, based on an average interest rate of 18%. However, SBP Governor Jameel Ahmad emphasized in a parliamentary committee meeting that the actual interest cost should be calculated by excluding the Rs2.5 trillion profit the central bank plans to remit to the federal government this fiscal year.
The finance ministry highlighted that monetary policy is easing due to reduced inflationary pressures. In the first month of FY25, money supply (M2) contracted by 3.2%, a sharper decline compared to the previous year. The ministry suggested that adjustments to the policy rate would help anchor inflation expectations and promote sustainable economic recovery.
Positive Economic Developments and Sectoral Outlook
The finance ministry reported several positive economic indicators at the start of the fiscal year, with a decline in CPI inflation suggesting progress towards single-digit inflation in the months ahead. The report cited resilience in both fiscal and external sectors, attributed to improved management, a better current account balance, and tax collections exceeding targets in July.
Inflation stood at 11.1% in July on a year-on-year basis, with a month-on-month increase of 2.1%. The sharp uptick in inflation last month was primarily due to budgetary measures that drove up the costs of essential goods.
The ministry expressed optimism about large-scale manufacturing sustaining its positive growth trajectory, supported by improved external demand, a stable exchange rate, declining inflation, and the easing of monetary policy. However, the report highlighted that the agricultural outlook for Kharif 2024 would depend on crop-specific weather patterns. Recent and ongoing rains could potentially affect crops such as rice, sugarcane, cotton, fodder, and vegetables.
Urea and DAP Offtake During Kharif 2024
During Kharif 2024 (April-July), urea offtake declined by 13.5% compared to Kharif 2023, while di-ammonium phosphate (DAP) offtake increased by 8.2%.
External Sector Trends
On the external front, the finance ministry reported upward trends in exports, imports, and workers’ remittances. The forecast estimates that exports will range from $2.5 billion to $3.2 billion, while imports will fall between $4.5 billion and $5 billion. The projection predicts remittances will fall between $2.6 billion and $3.3 billion for August 2024.
