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January 7, 2020

Inflation touches highest level in seven years: State Bank of Pakistan

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January 7, 2020

KARACHI: The State Bank of Pakistan (SBP) on Monday said during the first quarter of current fiscal year FY-20, Pakistan's economy moved progressively along the adjustment path, but inflation reached the highest level during the last seven years.

Pakistan’s economic growth is unlikely to meet the target of 4 percent this fiscal, due to soft trends in agriculture and manufacturing production, the central bank said, advising the government to address structural vulnerabilities to put the economy on a sustainable growth trajectory.

Performance of commodity producing sectors would likely remain subdued, the SBP said in its report. “In view of these developments, achieving the real GDP growth target of 4 percent appears unlikely,” the SBP said. The central bank’s report spells out in sharp detail the challenges being faced by the economy including mismatch related to exports quantum and earnings, delays in implementation of tax measures and weak management in food prices.

“Most of the improvement in the current account has come from a reduction in the country’s import bill; exports have yet to contribute significantly, as healthy quantum gains are not supported by price trends,” the SBP said.

Furthermore, while the drawdown in foreign exchange reserves has been reversed, the overall reserves position remains below the comfort level (in terms of import coverage).

The report further highlighted that the average headline CPI inflation reached 11.5 percent in Q1-FY-20, extending the steep upward trend persistent since the beginning of FY-19. Not only this level was double the inflation observed in the same quarter last year, it was also the highest level of quarterly inflation since Q4-FY-12. Macroeconomic stabilisation process picked up momentum with the initiation of the IMF’s Extended Fund Facility programme: the SBP continued to keep the monetary policy consistent with the medium-term inflation target; whereas, consolidation efforts were visible on the fiscal front.

The current account deficit in Q1-FY20 fell to less than half of last year's level, primarily on the back of significant import compression. Owing to low unit prices, exports growth remained low.

On the external front, the balance of payments continued to improve during Q1-FY-20. Beside significant improvement in trade deficit, and with the receipt of the first EFF tranche from the IMF and increase in foreign portfolio investment, the current account gap was plugged by the available financial flows.

These inflows also helped the SBP to increase its foreign exchange reserves by $656.2 million and reduce its net forward liabilities by $1.3 billion during the quarter.