FeaturedNationalVOLUME 16 ISSUE # 24

Crushing inflation

International financial institutions have started recognizing Pakistan’s economic revival. The International Monetary Fund (IMF) and the Asian Development Bank have revised up their projection for Pakistan’s real Gross Domestic Product (GDP) growth rate to 3.9pc. The growth projection is impressive but still lower than the region’s average, at a time when people in Pakistan are facing the worst inflation, which is higher than all South Asian countries.

Recently, the government increased the prices of flour, ghee and sugar by up to 53pc for sale through the Utility Stores Corporation (USC). The price of ghee at USC outlets was increased by almost 53pc from Rs170 to Rs260 per kg and the price of flour by about 19pc to Rs950 per 20kg bag from its existing rate of Rs800. Likewise, the sugar price was hiked from the existing rate of Rs68 to Rs85 per kg, an increase of 25pc. An official statement said the prices had been revised owing to an increasing gap between subsidised prices offered by the USC and the prevailing market prices.

The hike in prices at the Utility Stores is an admission of the worst inflation in Pakistan’s history. In this way, the government admitted that prices are out of its control in the open market. According to the Asian Development Bank (ADB), inflation is higher in Pakistan as compared to other countries of South Asia. In a report, it 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. The supplement to ADB’s flagship economic publication, Asian Development Outlook (ADO) 2021, said the improvement in Pakistan’s estimated growth at 3.9pc in the fiscal year (FY2021) was supported by the strong industrial growth coupled with steady remittance inflows. The inflation forecast for South Asia in 2021 is raised from 5.5pc to 5.8per cent, mainly reflecting a higher forecast for India, but unchanged at 5.1pc in 2022. Indian consumer price inflation rose to 6.3pc year on year in May as both food and fuel inflation outpaced expectations.

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, the result slightly lower than the 5.8pc forecast in ADO 2021 for the whole year. 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 4 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 from July. The Asian Development Bank has projected 7.2pc economic growth for developing Asia this year, compared with its 7.3per cent forecast in April.

The data shows that people of Pakistan are facing the worst inflation in the region. On the other hand, the Pakistan government claims inflation is under control. “Inflation, which was nearly at 9.7pc in April, has reduced and the number for June is 8.9pc. There is a need to reduce it further. There has also been a bit of reduction in headline inflation and core inflation,” the State Bank of Pakistan (SBP) said in its latest report.

The International Monetary Fund (IMF) has also revised up its projection for Pakistan’s real Gross Domestic Product (GDP) growth rate to 3.9pc. In its World Economic Outlook report 2021 (update), the IMF said, “Projections are revised up for the Middle East and Central Asia due to robust activity in some countries (such as Pakistan)”. The recovery, however, is not assured even in countries where infections are currently very low so long as the virus circulates elsewhere, it warned. Earlier in April, the IMF had projected Pakistan’s real GDP to grow at 1.5pc in the year 2021 despite a higher projected rate of 3pc by the State Bank of Pakistan (SBP).

The global economy is projected to grow 6pc in 2021 and 4.9pc in 2022. The 2021 global forecast is unchanged from the April 2021 report, but with offsetting revisions. Prospects for emerging markets and developing economies have been marked down for 2021, especially for Emerging Asia. By contrast, the forecast for advanced economies is revised up. These revisions reflect pandemic developments and changes in policy support. The 0.5 percentage-point upgrade for 2022 derives largely from the forecast upgrade for advanced economies, particularly the United States, reflecting the anticipated legislation of additional fiscal support in the second half of 2021 and improved health metrics more broadly across the group.

The IMF has cut India’s gross domestic product (GDP) growth forecast to 9.5pc for the fiscal year 2021-22, from the previous forecast of 12.5pc, citing the hit on economic activity and demand due to the deadly second wave of the COVID-19 pandemic. Growth prospects in India have been downgraded following the severe second COVID wave during March–May and expected slow recovery in confidence from that setback.

The latest international reports on inflation show prices are the highest in Pakistan as compared to other regional countries. The country’s economic growth is also lower than the regional countries, especially its archrival India. However, the new projections for Pakistan are encouraging and it will have to take measures to improve its GDP growth rate to meet the rising needs of its people. However, a high GDP growth rate without relief to the common people is meaningless. The government will have to take urgent measures to bring down prices of food, especially flour, sugar and cooking oil, whose prices have skyrocketed in recent months.