FeaturedNationalVOLUME 18 ISSUE # 25

Fears grow with rising inflation

The common people of Pakistan suffer the worst inflation of their lives. Last year’s floods have worsened the situation and people have to really struggle hard to make both ends meet. Many people, who were living a decent life a year ago, are struggling to stay afloat and meet expenses of their households after the prices of food, fuel, gas and electricity have skyrocketed in the country.

The situation has worsened to an extent that Pakistan is once again being compared to Sri Lanka for its poor economic conditions and high inflation. According to Bloomberg, Pakistan has the fastest rising prices in Asia, which has left behind even Sri Lanka where inflation was measured at 35.3pc in April. A year ago when the Pakistan Tehreek-e-Insaf government was voted out, the annual inflation rate was only 13.4pc, which skyrocketed within a year. The Sensitive Price Indicator (SPI)-based inflation for the week ended May 4, recorded an increase of 48.35pc on a year-on-year basis due to an increase in the prices of food and non-food items. According to the Pakistan Bureau of Statistics (PBS), the SPI for the week increased by 1.05pc due to an increase in the prices of food items. The year-on-year trend shows an increase of 48.35pc mainly due to a hike in the prices of wheat flour (177.61pc), cigarettes (146.44pc), potatoes (123pc), gas charges for q1 (108.38pc), tea (104.28pc), diesel (99.39pc), eggs (95.45pc), rice basmati broken (89.31pc), bananas (87.86pc) and petrol (87.81pc).

The SPI for the week under review was recorded at 254.84 points against 252.20 points registered in the previous week, according to the latest data. During the week, out of 51 items, the prices of 30 (58.82pc) items increased, nine (17.65pc) items decreased and 12 (23.53pc) items remained stable. “Inflation has continued to rise in Egypt, Pakistan and Tunisia, with the comparison of current policy interest rates relative to natural policy rate estimates suggesting that further interest rate increases are needed to stabilise inflation,” according to a recent report by the International Monetary Fund (IMF).

For this fiscal year, the World Economic Outlook has projected a 27.1pc average inflation rate. The forecast is 21.9pc for the next fiscal year. The IMF report said that where the policy stance was loose and inflationary pressures persisted, tighter monetary policy should be considered to stabilise inflation and inflation expectations like in Egypt, Pakistan, and Tunisia.

The World Bank has warned that Pakistan’s inflation is projected to further rise to 29.5pc in the fiscal year 2023 due to higher energy and food prices and a weaker rupee. However, the World Bank report on the macro poverty outlook for Pakistan said that inflation was expected to moderate over the forecast horizon as global inflationary pressures dissipated. It said real GDP growth was expected to “slow sharply to 0.4pc” in the fiscal year 2023 reflecting corrective tighter fiscal policy, flood impacts, high inflation, high energy prices and import controls. It added that agricultural output was also expected to contract for the first time in more than 20 years due to last year’s catastrophic floods. “Industry output is also expected to shrink with supply chain disruptions, weakened confidence and higher borrowing costs and fuel prices. The lower activity is expected to spill over to the wholesale and transportation services sectors, weighing on services output growth,” the report added.

It added that poverty in Pakistan would inevitably increase with pressures from weak labour markets and high inflation, warning that further delays in external financing, policy slippages, and political uncertainty poses significant risks to the macro poverty outlook for the country. In the absence of higher social spending, the lower middle-income poverty rate is expected to increase to 37.2pc in the fiscal year 2023. “Given poor households’ dependency on agriculture and small-scale manufacturing and construction activity, they remain vulnerable to economic and climate shocks,” the report added.

The lower activity is expected to spill over to the wholesale and transportation services sectors, weighing on services output growth. With dampened imports, the current account deficit is projected to narrow to 2pc of GDP in the fiscal year 2023 but widen to 2.2pc of GDP in the fiscal year 2025 as import controls ease. The report says Pakistan’s economy is under stress with low foreign reserves and high inflation. Activity has fallen with policy tightening, flood impacts, import controls, high borrowing and fuel costs, low confidence, and protracted policy and political uncertainty. Despite some projected recovery, growth is expected to remain below potential in the medium term.

In its latest report, the finance ministry admitted that the central bank’s contractionary monetary policy could not tame the inflationary expectations. In the economic outlook, the ministry said inflation was expected to remain in the range of 36pc to 38pc. The forecast is in line with the market expectations and ground realities. The highest inflation rate in Pakistan was recorded at 37.8pc in December 1973.

Seeing the gravity of the situation, the Asian Development Bank (ADB) has suggested Pakistan provide targeted subsidies to mitigate inflationary pressure on people and enhance the tax-to-GDP ratio to come out of the existing economic mess. However, the government has limited resources at its disposal. It is already running its affairs on debt. It is taking more debt to repay old loans. On the other hand, economic privileges accorded to Pakistan’s elite groups, including the corporate sector, feudal landlords and the political class add up to an estimated $17.4bn, or roughly 6pc of the country’s economy, according to a United Nations report. “Powerful groups use their privilege to capture more than their fair share, people perpetuate structural discrimination through prejudice against others based on social characteristics, and policies are often unsuccessful at addressing the resulting inequity, or may even contribute to it,” the report added.

Recently, Pakistan’s former Finance Minister Miftah Ismail said the country was making policies only for the welfare of its 1pc elite class. The state will have to change itself to provide basic rights to the common people.