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ADB forecasts higher inflation - Inside Financial Markets

ADB forecasts higher inflation

– Business Recorder

ISLAMABAD: The Asian Development Bank (ADB) forecast higher inflation projection for Pakistan, while saying that adjustments to energy tariffs and higher global commodity prices are expected to exert upward pressure on domestic prices.

The bank in its latest report, “Asian Development Outlook supplement 2021”, however, stated that in Pakistan, cotton and sugarcane production increased with favorable weather, while services bounced back as mobility tracking measures recovered beyond levels in March 2020, before the pandemic.

The report noted that the main risk to the outlook remains a resurgence in cases of coronavirus disease (Covid-19), especially given the emergence of a fast-spreading variant. Other risks include a protracted correction in the housing market that could induce an unexpectedly sharp slowdown in the People’s Republic of China, rising inflation, and persistent global supply disruption.

The report noted that the inflation projection for South Asia is revised up from 5.8 percent to 5.9 percent in 2021 and from 5.1 percent to 5.3 percent in 2022 on the expectation that global prices for food and other commodities remain elevated and as domestic factors come into play in specific economies.

In India, inflation in the first seven months of fiscal year 2021 averaged 5.2 percent, but some pressure is expected to build as chip shortages drive up semiconductor prices. The projection for the whole year is increased marginally to 5.6 percent.  The subregional inflation forecast for 2022 is revised up from 5.1 percent to 5.3 percent on similar expectations.

Much of the forecast upgrade reflects a higher projection for Pakistan, where adjustments to energy tariffs and higher global commodity prices are expected to exert upward pressure on domestic prices, it added.

The 2022 forecast is raised for Bangladesh as well, as the expected implementation of fiscal and monetary stimulus adds to pressure from higher fuel prices. In Sri Lanka, inflation forecasts for 2021 and 2022 are revised up in anticipation of the removal of price controls, high global prices, and import disruption.

By contrast, the 2021 inflation forecast for Maldives is lowered as subsidies on staples and utilities keep domestic prices in check despite, higher global commodity prices.

The report noted that economies elsewhere in South Asia look to be on track for previously projected recovery. In Nepal, agriculture grew by 2.4 percent in fiscal year 2021 (ended 15 July 2021) on a favorable monsoon season. With the spread of Covid-19 largely contained, services rebounded to grow by 2.5 percent in fiscal year 2021 after contracting by four percent in 2020. Growth prospects for fiscal year 2021 and fiscal year 2022 remain in line with update projections.

In Afghanistan, after the fall of the democratically-elected government on 15 August 2021, international assistance declined substantially, further squeezing the fiscal position of a country facing a major economic crisis.

Indian economy is expected to rebound strongly in FY2021 as a whole, albeit marginally slower than expected in the update, and grow by 9.7 percent. New Covid-19 cases remain at about 11,000 a day as of the end of November, but the government aimed to have vaccinated the entire population with at least one dose by the first week of December. In 2022, growth is still expected to moderate to 7.5 percent as domestic demand normalises.

The economic growth forecasts for developing Asia are downgraded slightly to seven percent in 2021 and 5.3 percent in 2022, and the recent emergence of a highly-mutated virus variant and a rise in infections globally indicate that the pandemic is far from over.

East Asia’s growth forecasts are revised down marginally for both 2021 and 2022 as the People’s Republic of China is now expected to grow more slowly, by eight percent in 2021 and 5.3 percent in 2022.

The growth forecast for South Asia is revised down to 8.6 percent for 2021, while the forecast for 2022 is maintained at seven percent. India’s projection is lowered to 9.7 percent for fiscal 2021 but remains unchanged at 7.5 percent for 2022.

After growth in Southeast Asia decelerated in the third quarter, the subregional forecast is revised down from 3.1 percent to three percent for 2021 but revised up to 5.1 percent for 2022. Central Asia’s growth prospects are substantially upgraded from 4.1 percent to 4.7 percent for 2021 and then from 4.2 percent to 4.4 percent for 2022. The Pacific is still forecast to contract by 0.6 percent in 2021 before growing by 4.7 percent in 2022. Regional inflation remains manageable, with the inflation forecast revised down a notch to 2.1 percent for 2021 and unchanged at 2.7 percent for 2022.

Syed Zaki Hussain

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Inside Financial Markets was a joint publication of Pakistan Stock Exchange (PSX)and Society of Technical Analysts Pakistan (STAP)