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Pakistan’s inflation to drop to 8.3pc in FY21: ADB

Pakistan’s inflation to drop to 8.3pc in FY21: ADB

ISLAMABAD: The inflation rate in Pakistan would slow down to 8.3 per cent in the fiscal year 2020-21, the Asian Development Bank (ADB) projected on Wednesday.

“Inflation is forecast to decelerate to 8.3pc in FY21 with the central bank expected to take further policy action to both manage inflation and boost economic activity,” ADB said in its latest annual flagship economic publication — the Asian Development Outlook (ADO) 2020.

It said inflation is projected to accelerate to 11.5pc in FY20, reflecting a sharp rise in food prices in the first part of the fiscal year and a 9.8pc drop in the value of the local currency against the US dollar in the first seven months of FY20.

A new price series that tracks price movements in rural as well as urban markets showed rural food inflation averaging 16.3pc in the first seven months of FY20, while urban food inflation stood at 14.5pc.

However, high food inflation is expected to be mostly transitory, likely to dissipate as food supplies improve in the second half of the fiscal year.

Further, a drop in international oil prices forecast in the second half of FY20 should translate to lower production and transport costs for goods and services, which could be passed on to consumers.

After raising the policy rate to 13.25pc at the beginning of FY20, the central bank reduced it in two steps to 11pc in March 2020 following the decline in global oil prices and sluggish demand under COVID-19. Growth in private sector credit has slowed considerably.

Inflation accelerated from 4.7pc in FY18 to 6.8pc in FY19 on poor harvests, tariff increases, and Pakistani rupee depreciation against the US dollar by 24pc following the adoption of a more flexible exchange rate.

Food price inflation rose to 4.6pc, while inflation for other goods accelerated to 9.2pc as tariffs on energy products were raised to manage mounting fiscal pressures. Inflation was estimated using rebased prices from FY16.

Earlier, to counter inflation, the State Bank of Pakistan (the central bank) had raised its policy interest rate by a cumulative 575 basis points to 12.25pc at the end of FY19.