Price hikes should not hurt growth

KARACHI:

The recent surge in petroleum product prices and electricity tariffs is not expected to hurt economic growth in the current fiscal year, despite the fact that the price hike will immediately raise the inflation rate by about a percentage point.

“Strong inflows of workers’ remittances, growth in export earnings, a significant increase in wheat and sugar production, and rebound in cotton production will support the achievement of economic growth of nearly 5% in FY 22, ”Pak-Kuwait Investment Company (PKIC) Head of Research Samiullah Tariq said while speaking to The Express Tribune.

Previously, Pakistan’s central bank had forecast economic growth in the order of 4-5%, while Pakistan’s Tehreek-e-Insaf (PTI) government had set the growth target of 4.8% for the country. 2021-2022 fiscal year.

The country recorded a growth of 4% in the previous fiscal year 2020-21.

The expected increase in the inflation rate has reinforced the central bank’s arguments for a gradual increase in interest rates by 1 to 1.25 percentage points over the next year.

“The government and the central bank should continue to take measures to create a balance between the rate of inflation and economic growth …

Previously, the government had increased electricity tariffs by 1.39 rupees per unit to fulfill the International Monetary Fund (IMF) condition for the resumption of the $ 6 billion loan program.

It also passes on rising crude oil prices on the international market to local consumers. As a result, the price of gasoline shot up by Rs 10.49 to a record high of Rs 137.79 per liter.

Likewise, the price of high speed diesel and light diesel increased from Rs 12.44 and Rs 8.84 to Rs 134.48 per liter and Rs 108.35 per liter respectively.

“The sharp increase in petroleum product prices and electricity tariffs should immediately raise the inflation rate by 1 to 1.25 percentage points,” Tariq said.

Both experts said the massive rise in global commodity prices was unsustainable. Prices are expected to fall in a few months following an improvement in the supply chain for global raw materials and a drop in demand.

“The prices of petroleum products could fall in the second half (January-June) of the current fiscal year,” Tariq said.

“With the current fiscal year still in its first months (October being the fourth month), there are still eight months to balance the economy and meet the growth target.”

“If global commodity prices had remained stable over the past few months, Pakistan would easily have achieved economic growth of over 5%. “

The government has rightly passed on the increase in the price of petroleum products to consumers in order to avoid mismanagement of finances. “No one would have bailed out the country if the government had absorbed the price hike.”

Inflation would remain close and close to the upper limit of 9% of the central bank’s projection of 7-9% for the year “with a rationalization of world commodity prices in the coming months,” he said. he declares.

Abbas, however, expects annual inflation to slightly exceed the upper limit of 9% and reach 9.25% in FY22, as prices for LNG, coal, fertilizers and food products. (like wheat, sugar, and cooking oil) have also skyrocketed. in the world market. They contribute to imported inflation.

The soaring reading of inflation may have an impact on the purchasing power of people belonging to low and middle income groups. However, this would not hurt the demand for essential commodities in the economy.

The country would continue to import essential products, including energy and food. While cutting imports of luxury cars and non-essential items was already the responsibility of the government to calm the overheating economy, he said.

“The noticeable growth of the large-scale manufacturing (LSM) sector suggests that the country would succeed in achieving the set economic growth target of 4.8% (in FY 22),” he said. declared.

The government and the central bank take steps from time to time to control inflation and support growth. In this regard, they imposed regulatory duties on imports and demanded traders to prepay the import amount of 100%.

Reading inflation slightly higher, however, would support the central bank to implement its past idea of ​​gradually raising the benchmark interest rate over the next year.

Posted in The Express Tribune, October 17e, 2021.

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