In Pakistan, a troubling economic landscape has taken hold since mid-2022, with inflation on a relentless upward trajectory. This surge in prices, exacerbated by measures imposed to secure IMF funding, is set to worsen in September due to soaring petroleum and electricity costs, compounded by currency depreciation.
Once again, global crude oil prices are on the rise, while the Pakistani rupee continues its steady decline against the US dollar. This troubling scenario spells disaster for the people of Pakistan. They now face the looming threat of sharply increasing fuel and electricity costs, further exacerbating the already burdensome inflation levels that have pushed the patience of the common citizens to its limits.
On September 2, public markets throughout Pakistan remained shuttered due to a strike organized by retail associations protesting the escalating electricity prices and rampant inflation. This disruption comes at a critical juncture as the country navigates a challenging path toward economic recovery. Major markets in Lahore and Karachi, Pakistan’s two largest cities, were notably affected by the strike. The deteriorating economic conditions, coupled with rising political tension in anticipation of a national election initially scheduled for November, though likely to be delayed, have ignited sporadic protests in recent weeks.
Consumer prices continued their unrelenting ascent in August, marking the second month of the current fiscal year with inflation hovering at a daunting 27.4 percent. This surge can primarily be attributed to the relentless surge in energy prices, which show no signs of abating. However, there was a slight deceleration from July’s peak of 28.3 percent, attributed to a modest drop in prices of perishable food items. On a month-to-month basis, the Consumer Price Index (CPI) revealed a 1.7 percent increase in August, as reported by the Pakistan Bureau of Statistics. This inflation spike in August was predominantly driven by significant hikes in the prices of essential food staples. Wheat flour, for instance, witnessed a staggering surge of 99.68 percent, while rice experienced a notable rise of 66.82 percent. Additionally, chicken prices soared by 67.56 percent, and sugar witnessed a substantial increase of 70.64 percent. These sharp increases in the cost of items within the food basket contributed significantly to the overall inflation rate for the month. Furthermore, gas prices surged by 62.82 percent, electricity charges increased by 8.24 percent, and motor fuel costs surged by 21.02 percent on a year-on-year basis.
The International Monetary Fund (IMF) has forecasted that the average Consumer Price Index (CPI) inflation for the fiscal year 2024 will be 25.9 percent, marking a significant improvement compared to the previous year’s 29.6 percent. Nevertheless, the government has set an ambitious annual inflation target of 21 percent for the current fiscal year. According to the latest IMF report, inflation is not expected to dip below 20 percent until the fourth quarter of fiscal year 2024.
In the fiscal year 2023, annual inflation reached a staggering 29.18 percent, significantly surpassing its budgetary target of 11.5 percent. This was primarily due to the unprecedented depreciation of the rupee, increased domestic taxes, and the rising prices of global commodities. Inflation was recorded at 12.15 percent in the preceding fiscal year, 2022.
Inflation has been on the rise since mid-2022, following the implementation of stringent measures by the PML-N-led government, which were demanded by the IMF to unlock stalled funding. Inflation is expected to surge further in September, primarily due to an unprecedented increase in petroleum product prices and electricity rates. The depreciation of the currency is also adding to the inflationary pressures.
Food inflation for August reached a staggering 38.08 percent in urban areas and 40.6 percent in rural areas. Non-food inflation stood at 16.3 percent in urban regions and 22 percent in rural areas. In August, non-perishable food items saw a modest 1.49 percent increase, while perishable food items experienced a notable decline of 8.75 percent on a week-on-week basis. Core inflation, which excludes food and energy prices, reached 18.4 percent in urban areas and a substantial 25.9 percent in rural areas. To combat inflation, the government has raised the interest rate to the highest level in the country’s history, reaching 22 percent.
On the other hand, the US dollar has gained significant influence over the exchange rate, leaving banks and forex companies somewhat powerless. Currency experts suggest that the dollar rates quoted by banks and exchange companies do not accurately reflect the real situation. Banks are hesitant to depict the true scenario for fear of a reaction from the State Bank of Pakistan (SBP), while exchange companies are reluctant to disclose the truth due to the potential consequences they may face. With the opening of imports, banks are concerned that the meager dollar inflows may not suffice to meet the high demand from importers. Consequently, currency dealers in banks are resisting the issuance of letters of credit for imports.
In the open market, the dollar’s price was reported at Rs318, a significant increase from the Rs296 exchange rate on August 11, the day the interim government assumed control. The dollar has appreciated by Rs22 since August 11.
Global oil prices have surged to their highest levels in over six months, breaking a two-week losing streak. This uptick is driven by expectations of tightening global supplies. Saudi Arabia is widely expected to extend a voluntary 1 million barrel per day oil production cut into October, thereby prolonging the supply restrictions orchestrated by the Organization of the Petroleum Exporting Countries (OPEC) and its allies.
In light of both national and international conditions, it is anticipated that prices in Pakistan will experience a sharp increase in the upcoming weeks and months. The closure of numerous industrial units has also resulted in a significant loss of jobs, further exacerbating the already troubling situation for the people of the country.
As Pakistan grapples with economic turmoil, characterized by surging inflation and a depreciating currency, the path to recovery appears increasingly challenging. Rising food and non-food prices, coupled with record-high interest rates, are taking a toll on the populace. The ever-strengthening sway of the US dollar only adds to the complexity of the situation. As international oil prices surge and supply concerns persist, Pakistan’s economic future remains uncertain, with mounting pressures on both individuals and businesses.