Pak inflation to reach double digit in H1

PAKISTAN, Jan 02: Economic analysts expect inflation to reach close to double digits in earlier months of 2019 while spillover round impact of Pakistani Rupee depreciation and energy tariff hikes will keep the trajectory at higher levels, reports Daily Times.
Inflation is expected to be propelled by second round effect of Pakistani Rupee depreciation, gas and electricity tariffs increase, they added.
Analysts at Elixir Brokerage House said despite 32 per cent depreciation in Pakistani Rupee/US Dollar over the last 12 months, in real terms it depreciated by 13 per cent till August 2018 (estimated 16 per cent till December-2018) based on Real Effective Exchange Rate (REER).
This can likely be explained by the rout in other global currencies against USD due to rising
interest rates in US as indicated by nominal depreciation of 17 per cent till August-2018 (estimated 21 per cent till December-2018) based on Nominal Effective Exchange Rate (NEER).
The direct relation between fuel and general inflation is expected to play out well as the former has substantial indirect impact on other items as it can be seen from similar trends in the graphs.
They anticipate CPI General to average 9.2 per cent in FY19 as against 5.2 per cent in FY18. However, they expect base effect to subside by second half of FY20 with CPI General Inflation averaging 7.6 per cent in FY20 and onwards.
Swift Pakistani Rupee depreciation had a lot to do with weaker external account imbalances owing to rising CAD and debt servicing in the absence of meaningful financial flows where SBP's foreign exchange reserves slid 47 per cent during 2018 to USD 7.5 billion (import cover of 1.3 months) from USD 14.1 billion (import cover of USD 2.6 months).
"We expect depreciation to be rather gradual going forward as the US is approaching the crest of interest rates where the Federal Reserve Bank expects 2 hikes in 2019 as against the market's expectation of no further increase in interest rates due to expected economic slowdown".
Besides, Pakistan has made arrangement of USD 6.0 billion in bilateral loans and USD 3.0 billion in terms of oil facility to meet its financial obligations. The likely entry into IMF programme would further shore up reserves and provide stability to Pakistani rupee.
"We estimate that Pakistani Rupee is still overvalued by 4.0 per cent based on REER and expect it to more closely track its fair value. Based on estimated REER-based fair value, we expect Pakistani Rupee/US Dollar to reach 150 by the end of December-2019.
However, rout in international oil prices is expected to provide much needed space to inflation. "We anticipate oil to remain at lower levels resulting in significant cut in petroleum product prices; however the limited fiscal space of government would likely lead to increase in General Sales Tax (GST) and Petroleum Development Levy (PDL) thus resulting in diminutive effect on inflation".