The fourth successive month where the headline inflation rate in Pakistan has topped 20%
The CPI for the month of September 2022 clocked in at 23.2%YoY, a significant decline from the previous month’s 27.3%YoY, mainly due to the falling electricity charges. The GOP also slashed the prices of petrol, mainly due to the reduced Petroleum Development Levy (PDL). This is the fourth successive month where the headline inflation has topped 20% and is unlikely to fall below this mark over the next quarter owing to floods.
The jump in monthly inflation is largely driven by the hike in prices of food items on the back of flood-related supply disruptions.
The monthly inflation during September was driven by food inflation and analysts expect food prices to continue to drive monthly inflation over the coming owing to supply-side shocks arising from losses and disruptions caused by floods. Since July, prices of wheat and milk have been on an upward trajectory, which together contributes nearly 20% to the food basket. Analysts expect prices of these items to remain elevated for the next three-to-six months owing to crop destruction caused by floods in Sindh and potential delays in wheat imports and a massive loss to herd size, affecting milk production.
The real interest rates stand at about negative 11.4% which makes a case for interest rate hikes in the coming months. However, with the country currently grappling with the challenges posed by floods, the rate hikes may not materialize. That said, the decision not to raise interest rates in the face of soaring inflation may result in currency weakening even further.
Also, with US$ appreciating against all the major currencies in the world and interest rates in US likely to rise even further, the pressure may build on the central bank to raise interest rates, especially if the global central banks adopt a similar strategy to manage inflation in their jurisdictions.
With inflation likely to remain elevated over the foreseeable future, the equity market performance may remain jittery. Expectations of foreign inflows in the coming months have stemmed the decline in the currency which may give a short-term respite to the market.
Pakistan’s headline inflation is expected to reduce after the government announcement to disperse fuel electricity tariff adjustments for the masses and is expected to slay the forecast that could have been 26.96% as per the initial estimates.
The tariff deferral has been brought forth as a temporary relief as exemptions in terms of subsidies could not be granted under the renewed IMF Program. On the other hand, food inflation continues to be problematic as most of the softening of palm oil prices is yet to be priced in the domestic retail markets, whereas wheat prices have started soaring in the aftermath of floods.
The current respite through administrative measures in electricity tariffs is relayed over the course of October 2022 to March 2023, a period susceptible to higher electricity costs in the absence of hydel electricity and the low availability of gas-based electricity. This can likely put the government’s measures in disdain if energy prices do not soften during winter.
Food inflation is expected to jump 27.7%YoY as wheat and flour prices continue to increase owing to wheat crop losses. The flood’s impact is estimated as high as 30%, whereby wheat sowing, especially in Sindh, may be delayed as flood water may unlikely recede for another 2-3 months. Pulses and tomato prices also continue to exacerbate in the aftermath of recent floods.
Domestic edible oil prices have softened considerably, while the full-blown impact of international palm oil prices is yet to be reflected. This can potentially bring some respite over the next few months.
Even though electricity tariffs have been reduced for consumers of up to 300 units of electricity a month, the housing index is likely to bear the impact of quarterly house rent adjustments as well as a rise in LPG prices, going forward. Electricity tariffs have been a key needle mover so far and more is yet to be seen as winter approaches.
Retail fuel prices have plateaued over recent months, backed by the lowering of crack spreads and oil prices as well as the change in pricing mechanism to deal with the exchange rates. However, the base effect continues to impair the decline in price trajectory.
The seasonal decline in hydel generation in the winter and the shortage of gas will be difficult to survive for Pakistan this year. Pakistan needs nearly 12 cargoes in a month to cater to the increasing winter demand this season. With only 7-8 cargoes under Qatar and Eni agreements, gas availability will be a key issue in the coming months, leading to higher reliance on FO-based power generation. The two key reasons for inadequate RLNG availability are i) LNG-producing countries and trading partners are over-committed with Europe and ii) PLL has not been able to create clout in the LNG market to ensure cargo availability.
Despite the government’s attempt to reduce the burden on the masses, the current dispersion of FCA on 6 months maintains a key assumption of softer international oil and RLNG import prices this winter. In the backdrop of a weak USD: PKR, such measures can be put in disdain if global energy prices do not reach equilibrium.
It is a reminder that with the decline in disposable income, rising inflation, depreciating PKR, and high-interest rates people may not find it advisable to invest in consumer goods and even cars. On top of all in the high-interest scenario, banks also prefer to invest in government securities.