The month of Ramadan in Pakistan always bring with it a massive spurt in CPI inflation, specifically due to Food index. This year, for the very first time in many years, National CPI in Ramadan is likely to stand around 8.7% in April’ 20 compared to 10.2% in March’ 20 and 12.4% in February’ 20. The food inflation is expected to drop by 1.4% with major decline in perishable items. After witnessing a decade high CPI inflation of 14.6% in January, the inflation has been on a deceleration mode in Pakistan. This deceleration was mainly owed to the monetary tightening policies of State Bank and economic stabilization that came as a result of government policies.
However, things are expected to be different this year owing to several factors with Pandemic of Coronavirus being the biggest factor.
Covid-19 – A major cause of Lower Food Inflation in Pakistan
Since the crisis of coronavirus started in Pakistan, there has been an uncertainty among masses regarding the impact of this spread and precautionary measures to follow. The varying strategies of provincial and federal government has also affected the goods transport initially as Sindh went for full lockdown. On the other hand, Punjab, KPK and Baluchistan allowed partial opening of few sectors specifically food related sectors. As Smart Lockdown continues in the country, there is a continuous trend of industries shutting down their plants, lower production of goods due to lower demand and less consumption due to lower spending power.
Food Price Index for April’20
Major food items including Onions (21%), Tomatoes (-18%), Chicken (-11.7%), Garlic (-13.7%) have reduced overall food inflation rate by 1.4%. The food related items including oil, vegetables, fruits, sugar, wheat, poultry, fertilizer and related items constitutes around 2/3rd of the NCPI basket. The month of March witnessed a confusion between the provinces regarding Goods transport and thus, the overall, NCPI on YoY basis declined 2.2% while food inflation declined by 1.8% in March’ 20.
Moreover, fertilizer companies reduced prices drastically in beginning of 2020 as government reduced GIDC on fertilizer. The decline in petroleum prices on Month on Month basis till date is -10% in petrol prices, -9.4% in diesel and -17.7% in LPG. Over all, the MoM CPI is expected to fall by around 0.8% for April’ 20.
Decline in Oil Prices, Lower GDP will further lower Inflation Rate
Currently, the continued crash in oil prices owing to low demand and zero storage capacity has resulted in negative imported inflation in Pakistan. The trend is expected to prevail as world is still under lockdown and oil future contracts keep witnessing sharp falls. The drop in oil prices will positively affect Goods Transport costs which in turn will lower food inflation further. This will result in lower CPI inflation for Pakistan and can easily bring down inflation rate for both food and non-food items to single digit (around 5%-6%). Moreover, the economic outlook for Pakistan in 2020 is expected to be lower than previous year due to effects of Covid-19 on fiscal position of country.
The downturn expected this year for Pakistan is expected to shrink the industrial sector of the country and increased unemployment which will decrease the spending power of consumers. The effects of this lower consumer spending are visible from start of Ramadan where food inflation has dropped for the first time in years. The decline in food inflation however, is a sign of low demand and a contractionary economic period for Pakistan in medium term.