The biggest failure of Imran Khan’s government was that it failed to reduce the prices of essentials. Undoubtedly, high inflation is an international issue but the PTI government shied away from taking action against profiteers and hoarders and prices fluctuated daily instead of weeks and months. Rising prices will also be a serious challenge for the new government as oil and international commodity prices continue to rise.
Undoubtedly, Pakistan’s economic indicators have improved in the last three years but the new government will not be in a position to provide massive relief to people. Former Prime Minister Imran Khan had cut the power tariff by Rs5 a unit and frozen fuel prices; Rs149.86 a litre for petrol and Rs144.15 a litre for high speed diesel. The subsidy on fuel costs the country over Rs66b a month. If the new government withdraws the subsidies on power and fuel, it will push the prices of all essentials even higher. If it continues the subsidies, it will become unbearable for the country in the long run.
According to international and national estimates, inflation is unlikely to come down in Pakistan in the near future. Instead, the Asian Development Bank has forecast inflation to pick up in the current fiscal year, averaging 11pc, reflecting higher international energy prices, significant currency depreciation, and elevated global food prices from supply disruptions. “Because Pakistan is a net importer of oil and natural gas, with both comprising almost 20pc of total imports, the country will continue experiencing strong inflationary pressure for the rest of the current fiscal year from the jump in global fuel prices related to the Russian invasion of Ukraine,” the lending agency said in its annual flagship publication Asian Development Outlook (ADO) 2022. It also forecast Pakistan’s economic growth rate to slow down to 4pc this year from 5.6pc in FY21 owing to tighter fiscal and monetary policies and Russia-Ukraine war fallout. “Pakistan’s revenue collection is still lower when compared with peers and it needs a strong reform effort to achieve its tax-to-GDP potential of 22-25pc. Pakistan’s growth is forecast moderating to 4pc in 2022 on weaker domestic demand from monetary tightening and fiscal consolidation before picking up to 4.5 in 2023,” the ADB said. “Slower growth in the current fiscal year reflects the government reactivating its stabilisation programme under the International Monetary Fund (IMF) Extended Fund Facility to narrow the current account deficit, raise international reserves, and cut inflation,” it added.
The ADB projected growth in South Asia to slow to 7pc in 2022, from 8.3pc in 2021, before picking up to 7.4pc in 2023. “The subregion’s growth dynamics are largely driven by India and Pakistan. Growth in India is forecast at 7.5pc this year, against 8.9pc in 2021, and 8pc in 2023, driven by strong investment growth. Bangladesh’s rapid 6.9pc growth in 2021 will continue into 2022 and 2023, and growth will accelerate in Bhutan and Nepal. After a vigorous rebound in 2021, growth in the Maldives will slow but remain strong, supported by the recovery in global tourism. Weaker growth is expected in Sri Lanka as consumption and investment remain muted due to monetary policy tightening, supply shortages, and inflationary pressures,” it observed.
In its latest report, the State Bank of Pakistan said core inflation was rising significantly in both urban and rural areas. “As a result of new developments, average inflation forecasts have been revised upwards to slightly above 11pc in FY22 before moderating in FY23. The current account deficit is still expected to be around 4pc of GDP in FY22. While the non-oil current account balance has continued to improve, the overall current account remains dependent on global commodity prices,” it noted.
Taking cues from global and domestic developments, the central bank jacked up the benchmark interest rate by a massive 250 basis points to a two-year high at 12.25pc. The State Bank of Pakistan sprang into action for the rate hike amid the domestic currency making a sudden and colossal drop of almost 2pc (or Rs3.39) and hitting a historical low level of Rs189.51 against the US dollar. The rate hike aims to indirectly extend its support to the rupee to partially recover ground against the greenback.
According to the SBP, the domestic political uncertainty, elevated global commodity prices, mainly the crude oil price in the wake of the Russia-Ukraine war, a significant drop in the country’s foreign exchange reserves and US Federal Reserve hints for strong upward revision in its benchmark interest are some of the global and domestic developments which forced authorities concerned to increase the interest rate and let the rupee plunge under the automatic and flexible exchange rate mechanism. Besides, the large current account deficit and elevated inflation reading compelled the central bank to jack up the key policy rate. “Since the last monetary policy committee meeting on March 8, the outlook for inflation has deteriorated and risks to external stability have risen,” it said in its monetary policy statement.
Externally, future markets suggest that global commodity prices, including oil, are likely to remain elevated for longer and the Federal Reserve is likely to increase interest rates more quickly than previously anticipated, likely leading to a sharper tightening of global financial conditions. While timely demand-moderating measures and strong exports and remittances saw the February current account deficit shrink to $0.5 billion, its lowest level this fiscal year, “heightened domestic political uncertainty contributed to a 5pc depreciation in the rupee and a sharp rise in domestic secondary market yields as well as Pakistan’s Eurobond yields and CDS (Central Depository Systems) spreads since the last MPC meeting,” the SBP noted.
The current situation shows the new government will not be able to provide immediate relief to people from rising prices. The situation can improve if the Ukraine war ends. In the meantime, it should take measures to convince the people it is serious about tackling inflation.