The rupee dropped to a 10-month low against the US dollar in August. Pakistan also faces a balance of payment crisis as its imports are increasing at a rapid pace than its exports, which will put more pressure on the Pakistani currency and lead to higher inflation.
The weakening rupee will further push up the prices of food, essentials and almost everything. In July, the country saw double-digit increases in the cost of basic kitchen goods, gasoline, and electricity, though the inflation rate dropped to 8.4pc. Despite significant increases in costs of goods that impact every household, it was the lowest inflation rate in nine months, according to the Pakistan Bureau of Statistics. A 33pc hike was recorded in mustard oil costs, a 32.9pc increase in vegetable ghee prices, and a 31.7pc surge in cooking oil rates, affecting every family negatively. In July, the PBS had recorded a 21.7pc hike in power costs and a 16.4pc increase in gasoline prices compared to the same month the previous year. The price hike comes after the rupee’s worst drop in two months, with the currency closing at Rs163.67 to the dollar on August 2. The rupee was trading at Rs153.36 to the dollar on May 3, a loss of Rs10.31 or 6.7pc in only two months.
The fall in the value of the rupee will raise the cost of all imported goods, including wheat, sugar, cooking oil, crude oil, and industrial raw materials. The Wholesale Price Index (WPI), which measures wholesale market prices, increased by 17.3pc in July compared to the same month a year earlier. In four to six months, retail market prices usually approach wholesale pricing levels, suggesting that prices will stay high in the foreseeable future.
According to the State Bank of Pakistan, inflation fell from 11.1pc (y/y) in April to 9.7pc in June. “For the first time since January, food prices fell on a month-on-month basis in June. The headline inflation should begin to dissipate more visibly in the second half of the year when the February electricity tariff increase drops out of the base, converging to the 5-7pc target range over the medium term. The key risk that could lower inflation is resurgence in the pandemic domestically and globally,” it said in a recent report. The government has set an average inflation goal of 8.5pc for the current fiscal year, implying that year-on-year inflation in the fiscal year will likely stay in double digits.
According to the Asian Development Bank, inflation is higher in Pakistan as compared to the other countries of South Asia. It raised its inflation forecast for South Asia in 2021 from 5.5pc to 5.8pc, mainly reflecting a higher forecast for India, but unchanged at 5.1pc in 2022. The international financial institution said inflation in Pakistan averaged 8.8pc in the first 11 months (July to May) of FY2021 on rising global commodity prices, especially for food and crude oil. Indian consumer price inflation rose to 6.3pc year on year in May as both food and fuel inflation outpaced expectations.
The ADB has raised the inflation forecast for India in FY2021 by 0.3 percentage points to 5.5pc while keeping the forecast for FY2022 at 4.8pc. Elsewhere in the sub-region, inflation in Bangladesh averaged 5.6pc in the first 11 months of FY2021 as lackluster domestic demand slowed nonfood inflation early on. Bhutan suffered inflation at 8.2pc in the first 9 months of FY2021 as food prices jumped. Average consumer price inflation in Maldives was 0.3pc in the first four months of 2021 and is likely to fall in the rest of the year following the government’s reinstatement in May of water and electricity subsidies and its plan to cut internet service prices.
As the rupee continues to fall, prices of daily-use items are increasing. The government jacked up the price of petrol by Rs1.71 per litre from August 1. Petrol is now available at Rs119.80 per litre. The price of kerosene oil was also increased by Rs0.35 per litre to Rs87.49 per litre. On July 15, the government had increased the price of petrol by Rs5.40 per litre and that of HSD by Rs2.54 per litre. The prices of kerosene and LDO were also raised by Rs1.39 and Rs1.27, respectively. Earlier, the government had increased the prices of all petroleum products by up to 4.7pc at the beginning of July.
The Pakistani currency is under immense pressure from rising imports and Covid-19-related expenditure. The country’s current account recorded a deficit of $1.85 billion in the fiscal year 2020-21, despite remaining surplus for the first 11 months of the previous fiscal year. The State Bank of Pakistan (SBP) said the deficit in June had reached $1.644b, the highest monthly deficit in FY21. The government was expecting FY21 to end up with a surplus but a large deficit in June proved it wrong. However, the SBP said the moderate increase in the current account deficit was sustainable. “Our current account deficit is fully funded which means we are seeing enough sources and the current account deficit is overfinanced because of it. Our prediction is that our reserves will increase in this fiscal year. There had been three warning signs in the past whenever the country’s current account deficit had skyrocketed — when the CAD was increasing very fast, when the exchange rate remained unchanged and the SBP’s reserves were falling. The three warning signs are not present during the current increase which is why the SBP is confident that the moderate increase in our current account deficit will be sustainable,” the SBP governor explained.
On the other hand, some experts fear the balance of payment crisis will worsen in the coming months. According to former finance minister Dr Hafiz A Pasha, Pakistan’s external debt and obligations-related repayment would be estimated at around $40 billion over the next three years, which would pose a serious challenge to the national economy. He projected the current account deficit at $10 to $12 billion for the current fiscal year. If the deficit continues to widen, it will not only put pressure on the economy but also the rupee, which is weakening by the day. It will further push up prices in the country, making the lives of people more miserable.