FeaturedNationalVOLUME 18 ISSUE # 51

Challenges persist amidst declining inflation

While Pakistan is witnessing a declining trend in headline inflation, with the current rate reduced to 27%, the celebratory tone may be premature. This decrease, while a positive sign, still leaves the majority of Pakistani households struggling to make ends meet. The economic challenges persist, and external factors, such as exchange rate fluctuations and regional instability, continue to pose threats to the nation’s economic stability.

The projected Consumer Price Index (CPI)-based inflation for October in Pakistan is estimated to be in the range of 27% to 29%. According to the latest ‘Monthly Economic Update and Outlook’ report from the finance ministry, it is anticipated that inflation will remain more contained compared to the high levels observed in the first quarter of FY2024.

This development is attributed to several factors, including stability in international food prices, as reported by the Food and Agriculture Organization (FAO). The report noted that while some food categories, such as vegetable oils, dairy, and meat, saw price declines, others like sugar and cereals experienced price increases. However, these fluctuations balanced out, resulting in an overall index value of 121.5 points, which is nearly identical to August 2023.

On the domestic front, the interim government’s decision to consecutively reduce petrol and diesel prices on two occasions, coupled with a decline in international markets and a stronger domestic currency, is expected to alleviate inflationary pressures in the country.

Furthermore, the efforts of subnational governments to implement lower fares for local public and freight transportation in line with reduced fuel prices are expected to relieve stress on consumer prices, as mentioned in the report.

In September 2023, the year-on-year inflation reading stood at 31.4%, compared to 27.4% in the previous month and 23.2% in September 2022, according to the Pakistan Bureau of Statistics (PBS). Exports of goods and services for October are projected to remain at around $3 billion, similar to what was observed in September. It is expected to gradually gain momentum in the coming months, particularly as Large Scale Manufacturing (LSM) showed growth of 8.4% in August on a monthly basis.

Imports, on the other hand, are displaying fluctuations on a monthly basis and are expected to range from $4 billion to $4.5 billion in October, as the Pakistani rupee continues to strengthen against the US dollar. The report mentioned that, taking all these factors into account and with a positive outlook for remittances, the current account is expected to continue its improved monthly trend.

While there are signs of improvement, it is still challenging to determine if the worst is truly behind us. In October, consumer inflation eased but remained high at 26.9%. This means that, on average, consumers had to pay 27% more for the same quantity of goods and services compared to a year earlier. Certain items, especially in urban areas, saw significant price increases, such as condiments and spices, sugar, wheat flour, and rice. The drop in fuel prices from previous months provided some relief, as did the decrease in prices of perishable food items. However, as incomes did not rise in proportion, many individuals would have had to make difficult decisions about how to allocate their already stretched household budgets.

Some may be inclined to celebrate the decreasing trend in headline inflation as a success for the current economic managers, it would be wiser to resist that temptation. The current ‘reduced’ inflation rate of 27% is still painfully high for the majority of Pakistani households, many of whom have likely already exhausted any margin they had between their basic needs and their income. For many, dealing with inflated prices is no longer a matter of cutting unnecessary expenses; it’s about how much they can still afford to put food on the table while trying to make ends meet. Any further price increases, even if they happen at a slower pace, will only make it harder for them to afford essential items. This is not a moment for celebration.

Moreover, it’s essential not to overlook Pakistan’s ongoing exchange rate challenges. In fact, these pressures appear to be resurfacing, as indicated by recent movements in the currency markets. Additionally, the instability in the Middle East is a looming concern, and any significant escalation in that region could spell disaster for Pakistan’s struggling economy. Therefore, it’s crucial for the government to use any available room to restore economic stability and kickstart the economic engine once more. This is not a time for complacency.

In the face of high inflation and ongoing economic hardships, celebrating a modest reduction in inflation rates is premature. The challenges of high living costs, exchange rate vulnerabilities, and regional instability persist. It is imperative for Pakistan’s economic managers to remain vigilant and focused on restoring economic stability and reinvigorating the nation’s economic engine. Complacency is a luxury the country cannot afford in these trying times.