FeaturedNationalVOLUME 18 ISSUE # 20

No relief in sight from the vicious cycle of inflationary spiral

The nation is caught up in a vicious cycle of inflationary spiral and rising debt burden. According to the latest data released by the Pakistan Bureau of Statistics, inflation measured by the Consumer Price Index (CPI) reached an all-time high of 35.37 per cent year-on-year in the month of March. This marks the highest CPI increase on record since July 1965. By contrast, the inflation rate recorded in March 2022, was only 12.72pc.

Official figures show that prices in urban and rural areas increased by 32.97pc and 38.88pc respectively. The short-term rate of inflation measured by the Sensitive Price Indicator (SPI) in the last week of March hit a record 46.65pc, while monthly inflation recorded by the CPI reached 31.6pc in February — the highest in six decades. It may be added here that consumer prices have risen steeply over the past several months, with annual inflation staying above 20pc since June last year.

In the days ahead, the price situation is going to worsen further. Last week, the finance ministry forecast a spike in inflation due to a second-round effect of policy decisions to raise energy and fuel prices, the central bank’s policy rate, and the rupee’s depreciation to secure IMF funding. In its Monthly Economic Update & Outlook, the ministry stated that the recent political and economic uncertainties were accentuating inflationary pressures. The ministry explained that inflation was expected to stay at an elevated level owing to market frictions caused by relative demand and supply gap of essential items, exchange rate depreciation and recent upward adjustment of fuel prices. Also, due to the devastation caused by floods, the production losses have not yet been fully recovered, especially those of major agricultural crops. Consequently, the shortage of essential items has persisted.

Moreover, the economic distress resulting from the delay in the finalization of the IMF’s stabilisation programme has deepened economic uncertainty and inflationary expectations. According to experts, ineffective policy measures by the authorities in containing the inflationary spiral are also to blame. Despite the SBP’s contractionary monetary policy, the inflationary trends are not subsiding, especially in view of Ramazan-oriented demand pressures.

On top of inflationary stress, Pakistan is now facing the back-breaking burden of mounting debt. According to the latest SBP figures, Pakistan’s public debt increased by over 28 per cent or Rs11.3 trillion between June 2021 and September 2022 to Rs51.13tr mainly because of faulty policy prescriptions like devaluations and interest rate hikes, rather than debt inflows for economic growth.

The total public debt which was Rs39.87tr by end-June 2021, increased to Rs49.19tr by end-June 2022, showing an increase of Rs9.3tr. This further rose to Rs51.13tr by end-September 2022. In the process, the Fiscal Responsibility & Debt Limitation Act (FRDLA) threshold was breached by a big margin: the public debt to GDP ratio increased from 71.5pc of GDP in June 2021 to 73.5pc by end of June 2022. Resultantly, the per capita debt increased from Rs175,625 per person in June 2021 to Rs225,247 in September 2022 – an additional indebtedness of almost Rs50,000 per person in just 15 months, up by 28pc.

According to the Debt Policy Statement submitted to the parliament last week, this was mainly due to adverse exchange rate movement on account of the depreciation of the rupee against foreign currencies which stood around 5pc of GDP. The policy statement revealed that the domestic debt which stood at Rs26.26tr by end-June 2021 increased to Rs31.04tr a year later on June 30, 2022 and further rose to Rs31.40tr by end-September 2022. Likewise, the external debt increased from Rs13.60tr in June 2021 to Rs18.16tr in June 2022 and to Rs19.73tr in the following three months up to September 2022. The report said that the increase in public debt was on account of exchange rate losses of about Rs3.76tr, followed by Rs3.18tr due to an increase in interest rates and about Rs2.43tr for primary deficit impact.

The policy statement noted that external public debt stood at $88.8bn in end-June 2022, witnessing a net increase of around $2.4bn during the year. Overall, the debt from multilateral and bilateral sources increased by $2.4bn. In addition, Pakistan raised $1bn through the issuance of a multi-tranche transaction of 5, 10 and 30-year Eurobonds, besides $300m commercial loans while $700m debt was reduced through non-resident investments in Government Securities, Naya Pakistan Certificates and Pakistan Banao Certificates. The share of external debt in total public debt increased from 34pc in 2020-21 to 37pc in 2021-22. The increase was attributable mainly to exchange rate depreciation rather than excessive external borrowings.

Overall, the outlook for the economy remains gloomy with no remedial measures in sight. Nothing is being done to boost exports or attract foreign direct investment. On the home front, austerity measures announced by the government have turned out to be no more than an eyewash. In the given circumstances, the nation will need to gear up for more hardships in the days ahead.