Macro Analysis /
Pakistan

Pakistan economy: Administrative tools to reduce headline inflation to 25.3%

  • Pakistan’s headline inflation is expected to reduce to 25.3% in Sep’22 as the government defers fuel adjustments

  • Food inflation continues to be problematic as most of the softening of palm oil prices is yet to be priced in

  • Respite from fuel adjustments is susceptible to costly generation in absence of hydel and gas availability

Intermarket Securities
30 September 2022

Pakistan’s headline inflation is expected to reduce to 25.3% in Sep’22 from 27.3%. The government’s announcement to disperse fuel electricity tariff adjustments for masses is expected to slay the forecast that could have been 26.96% as per our 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 Oct’22-Mar’23, 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 government’s measures in disdain if energy prices do not soften during winters.

  • Food inflation is expected to jump 27.7% YoY as wheat and flour prices continue to increase owing to wheat crop losses. The floods 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 about a -0.5ppt respite over the next few months.

  • Even though electricity tariffs have been reduced for consumers of up to 300 units electricity a month, housing index is likely to bear the impact of quarterly house rent adjustment as well as 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 lowering of crack spreads and oil prices as well as the change in pricing mechanism to deal with exchange rate. However, the base effect continues to impair the decline in price trajectory.

Low hydel and gas power can put administrative attempts in disdain

The seasonal decline in hydel generation in the winters and shortage of gas will be difficult survival for Pakistan this year. Pakistan needs nearly 12 cargoes in a month to cater the increasing winter demand this season. With only 7-8 cargoes under Qatar and Eni agreements, gas availability will be a key issue in 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 a clout in LNG market to ensure the cargo availability.

Despite government’s attempt to reduce 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.