Naveed Ahmed

Anchoring inflationary expectations is essential to achieving the medium-term inflation objective of 5% to 7%. This objective can only be achievable with coordinated monetary and fiscal policy initiatives, reports WealthPK. Dr. Amanat Ali, Assistant Professor, School of Economics, Quaid-i-Azam University, Islamabad, told WealthPK that inflationary pressures have prevailed for a considerable period and are expected to persist.

If allowed unchecked, this might result in bigger inflation rates. The Monetary Policy Committee (MPC) raised the policy rate to 17 % to address this situation. However, on the other hand, this decision paves the way for a further slowdown in economic activity, ultimately creating downside risks for revenue collection and growth. Thus, the current budgetary situation is incompatible with tightening monetary policy.

He said in light of changing macroeconomic indicators, fiscal policy measures must be aligned with monetary policy decisions to control inflation and pave the way for long-term economic development. Discussing the MPC decision, he said the committee lifted the policy rate to 17% to control inflation. The committee has increased the policy rate due to three significant economic events.

First, inflation remains high despite a small decline in November and December. Moreover, there has been an increased trend in core inflation over the last ten months. Therefore, consumers and businesses expect a higher inflation rate in the future.

Second, despite the continuous tight monetary policy and decrease in the current account deficit, the external sector confronts new and pressing problems, including fresh financial inflows and continuous debt repayments. As a result, official reserves have been progressively dwindling.

Thirdly, the near- to short-term forecast for global economic and financial conditions is still being determined, with ambiguous implications for the local economy. The predicted reduction in global demand may hurt emerging nations like Pakistan’s export and worker remittance prospects. He said if the international commodity prices stabilize, it might assist in reducing inflation, and if global financial circumstances improve, it could alleviate pressure on the economy’s outer workings.

After explaining the reasons for an increase in the policy rate, he emphasized prioritizing engagement with global and bilateral partners to alleviate internal uncertainty and address short-term difficulties in external sector payments. He explained that overall economic activity is slow after policy tightening and exogenous shocks, such as floods in 2022. Dr. Amanat Ali said large-scale manufacturing (LSM) production decreased by 5.5%, mirroring an industry-wide trend.

“In future, firm production cuts and supply restrictions may have a more detrimental impact on LSM development, so there is a need to focus on this sector. In the case of agriculture, the most recent data on cotton production indicates a lesser harvest than anticipated. Even though there have been optimistic reports about sugarcane production and wheat planting for the current season,” the QAU professor added.

He said the external sector experienced a severe import decline resulting from tougher regulations and regulatory measures that needed review. He explained that the food and petroleum industries were the only exceptions to the import decline. In light of this, the State Bank of Pakistan (SBP) must emphasize the need to implement energy efficiency measures and establish reasonable pricing for petroleum goods to minimize dependency on foreign energy sources.

He said the decrease in export revenues and remittances narrowed the current account deficit. However, the foreign sector remains susceptible to shocks such as a delay in obtaining state financial infusions, debt repayment, and pervasive political instability.

After considering these variables, he suggested that the SBP must consider the risks to its baseline growth projection. Moreover, there is a need to coordinate with the government for effective fiscal and monetary policy measures.

Credit: Independent News Pakistan-WealthPk