FeaturedNationalVOLUME 19 ISSUE # 6

A Balancing Act Amidst Inflation Challenges

In the ever-evolving landscape of Pakistan’s economic trajectory, the Asian Development Bank (ADB) has upheld its forecast, keeping the nation’s economic growth at a steady 1.9%. This decision reflects a cautious optimism tempered by the persistent specter of inflation, which, although expected to ease, continues to cast a shadow over the nation’s purchasing power.

The Asian Development Bank (ADB) has maintained Pakistan’s economic growth forecast at 1.9%, reflecting a moderate level of confidence in the economy, despite acknowledging a slight ease in inflation. These projections align with the expectations of the government. According to the Asian Development Outlook update report released by the Manila-based lender, Pakistan’s overall recovery is hindered by moderate confidence and elevated inflation eroding purchasing power.

Hope flickered briefly in Pakistan’s struggle against inflation, only to be swiftly extinguished, leaving households to grapple with the escalating costs of essential items. Despite a marginal 0.51% decline, the weekly inflation rate stubbornly persists above 40%, contributing to a month and a half of economic discomfort.

While headlines may have touted a slight dip, the reality on the ground paints a starkly different picture. Out of the 51 essential items monitored, 18 witnessed price hikes, encompassing crucial staples like eggs, onions, garlic, dals, and cooking gas. These everyday necessities, vital for a balanced diet, have become even more inaccessible for many families.

The report underscores the volatility in the prices of essential items, revealing an uptick in the costs of 18 items, including eggs, onions, dal moong, gram dal, rice, garlic, lentils, and firewood. Additional commodities such as LPG, clothes, and bananas also experienced a surge in prices. Conversely, potatoes, tomatoes, sugar, and flour saw a decrease in prices, offering some relief. Notably, the costs of chicken, cooking oil, petrol, and diesel also witnessed a decline over the past week. As the nation grapples with economic challenges, the sustained high inflation rates raise concerns about the affordability of essential goods for the general population.

While the ADB has kept its economic growth forecast unchanged for Pakistan for the current fiscal year, it has raised the growth forecast for South Asia to 5.7% in 2023. This upward revision is primarily attributed to higher-than-expected growth in India for the July–September quarter. The growth forecasts for the sub-region for 2024 remain at 6%, despite downward revisions for Bangladesh and Maldives. The ADB notes that the 2024 growth projections for other economies in the sub-region remain unchanged.

The ADB released this report a day after the central bank maintained its policy rate at 22%, citing a tight external financing position that precludes a rate cut. The State Bank of Pakistan (SBP) also anticipates a moderate economic recovery during the current fiscal year. In recent review talks, the International Monetary Fund (IMF) lowered Pakistan’s growth forecast to 2%, while Fitch Ratings, a US-based credit rating agency, has kept Pakistan’s credit rating unchanged at CCC. Fitch expressed skepticism about Pakistan’s ambitious external funding targets, deeming it challenging for the government to secure $1.5 billion in Eurobond and $4.5 billion in commercial bank borrowing.

Despite the government’s expectations of an improved credit rating following the successful completion of the first review of the $3 billion bailout package, Fitch Ratings suggests there are risks of delays and uncertainty in Pakistan’s ability to negotiate a follow-up IMF programme after the SBA concludes in March 2024.

The federal government’s first-quarter GDP growth figures indicated a 2.1% growth rate during the July-September quarter, driven primarily by a recovery in the agriculture sector. The manufacturing sector also recorded a moderate recovery, while the services sector exhibited subdued growth. The ADB, in its September outlook report, highlighted Pakistan as an outlier in Asia with the highest inflation rate and the fourth-lowest economic growth rate among 46 economies in the region. Regarding inflation, the ADB anticipates a slowdown in the coming months, citing fiscal consolidation, monetary tightening, and improved availability of food and key imported inputs.

Three months ago, the ADB projected Pakistan’s inflation at 25%, significantly higher than the earlier 15% projection. The report indicates that inflation averaged 28.5% over July–October but is expected to ease in the face of fiscal and monetary measures, as well as improved food and input availability. The inflation forecast for South Asia remains unchanged at 8.6% for 2023 but has been revised upward to 6.7% for 2024.

The central bank, in a statement released a day earlier, indicated that inflation expectations among both consumers and businesses, while showing some improvement in recent months, continue to remain at elevated levels. The bank stated that unless there is a substantial additional increase in administered prices, headline inflation is expected to decrease significantly in the second half of this fiscal year. This anticipated decline is attributed to factors such as restrained aggregate demand, alleviation of supply constraints, moderation in international commodity prices, and a favorable base effect.

Despite a substantial increase of up to 520% in gas prices in November, the government is currently in the process of further raising prices, with the new adjustments set to take effect from the upcoming month.

In the face of sustained challenges, the economic forecast for Pakistan remains resilient, yet not without its hurdles. The ADB’s decision to maintain the growth forecast underscores the delicate balance the nation must strike in fostering confidence while mitigating the impacts of inflation. With a backdrop of evolving international dynamics and domestic policy adjustments, the coming months promise a complex dance for Pakistan’s economy. As the government contemplates further price adjustments, and the central bank underscores the potential for a decline in inflation, the nation treads cautiously, navigating the path to economic recovery in the midst of global uncertainties.