Islamabad 17 November 2021
Pakistan, in the recent past, is confronted with the unfolding enigma of inflation crises, which is sending ripples across the economy. The vulnerable segments as well as the middle-income class are feeling the pressure. Amid the heated discussions and in parallel the unguided numbers on inflation creates further speculation and uncertainty. This, in turn, cause other economic issues – for instance, hoarding – which surface as collateral to inflation. Pakistan Institute of Development Economics (PIDE) comes to the rescue here, with its brief publication “PIDE Inflation Analytics November 2021”.
PIDE, through its inflation (read Consumer Price Index inflation) forecasting models predicts the inflation to remain between 10.0 to 10.5 % for FY2022 and 11.0 to 11.5 % for the first half of FY2023. In comparison to other forecasts made by the State Bank of Pakistan (7 to 9 %), International Monetary Fund (8.5 %), and Asian Development Bank (7.5 %), PIDE forecasts inflation to remain substantially higher.
The institute expects inflation to continue oscillating in double digits till December 2022 with an upward momentum through the remaining part of FY2022 and the first half of FY2023. PIDE strongly believes that there will be a significant upward revision in the State Bank of Pakistan’s forecasts (expected range of 9.0 to 11.0 % from the previous forecast of 7.0 to 9.0 %).
Despite being significantly higher than forecasts from other institutions, PIDE’s forecast is perfectly in line with the results of the Survey of Industry experts (with the recorded responses of 61 respondents). More than 80 % of the respondents’ views align with PIDE numbers, with just slight variations. They opine that inflation will only be back in the single-digit in FY2024, not before that. Survey participants also portray a grim picture of the economy, while enunciating that they do not expect GDP growth to grow above 4.0 to 4.7 % for the next several years.
Moreover, PIDE analysis also indicates that inflation will continue the upsurge for the next five quarters. Out of 94 composite commodities, around 70 commodities are projected to continue with double-digit inflation. Out of these 70, more than 25 commodities projected more than 14 % inflation. PIDE also anticipates inflation to remain broad-based – both food and non-food contributing to high inflation. Measures of uncertainty, fan charts, also show that inflation is expected to remain between the range foretold by PIDE’s models.
The increasing trend of inflation with high persistence and broader base supports PIDE’s suggestion for an immediate adjustment in the policy rate by at least 75 basis points. PIDE’s inflation forecasting models anticipate a one % increase in electricity prices, translating into an 8 % increase in fuel prices and upward policy adjustment of 75 basis points in policy rate within the next two months.
Given the prior information that Pakistan requires at least a 14 % increase in electricity prices to overcome the crushing burden of ever-increasing circular debt. PIDE introduced an additional shock of 13 % in the next five months and found that with the full adjustment of electricity shock, inflation could go up 0.43 % for FY2022 and 0.66 % for the first half of FY2023.
Similarly, the additional shock of 10 % in fuel prices could further push the inflation by 0.32 % for FY2022 and 0.46 % for the first half of FY2023. The inflation forecast anticipates an 8 % policy rate and expects inflation to come down by 0.26 % till December 2022 with every 100 basis points increase in the policy rate.
