Pakistan’s economy is facing significant challenges, including high inflation, policy uncertainties, and a slowdown in economic activity. The combination of these factors has put immense strain on the country’s financial stability and the well-being of its people.

The people of Pakistan are currently enduring unprecedented levels of inflation, creating immense challenges for their daily lives. The situation has been exacerbated by the devastating floods, which have further compounded the struggles faced by ordinary citizens. Rising prices of essential commodities such as food, fuel, gas, and electricity have placed an enormous burden on households, forcing many who previously enjoyed a decent standard of living into a state of financial hardship. Pakistan’s economic conditions have deteriorated to a concerning extent, drawing unfavorable comparisons to Sri Lanka due to its poor economic performance and soaring inflation. Recent reports from Bloomberg indicate that Pakistan now has the fastest-rising prices in Asia, surpassing even Sri Lanka, where inflation reached 35.3% in April. The alarming escalation of inflation is evident when comparing it to a year ago when the Pakistan Tehreek-e-Insaf government was voted out of power, and the annual inflation rate stood at a relatively modest 13.4%. Within a span of just one year, inflation has skyrocketed, exacerbating the economic crisis faced by the country.

According to analysts at JS Global, Pakistan is expected to experience a surge in headline inflation measured by the Consumer Price Index (CPI) in May, despite a decline in petroleum prices. Projections suggest that the inflation rate may reach a record-high of 37.27 percent, with a month-on-month (MoM) increase of 1.07 percent. Although this increase is lower than the average 3.3 percent MoM increase observed in the past four months, it aligns more closely with the typical 0.9 percent MoM increase seen under normal circumstances. If these projections materialize, the year-to-date headline CPI for the first 11 months of FY23 would stand at 29.03 percent. However, the recent decrease in petroleum prices is not expected to have an immediate impact on the inflation readings for May 2023. Analysts have noted that factoring in the reduction in petroleum prices would result in a decline of 10 basis points (bp) in their estimates. The significant rise in inflation can be primarily attributed to a notable increase in food prices, which account for approximately 30 percent of the CPI basket. Analysts predict that food inflation will reach around 48 percent year-on-year (YoY) this month, with a MoM increase of 0.81 percent. While this represents a slowdown compared to the average monthly increase of approximately 4.5 percent observed over the past four months, it still reflects a substantial upward trend. Analysts anticipate that the inflation reading for May 2023 will mark the peak, as the year-on-year trend is expected to soften in the following months due to the base effect starting from June 2023. “With an expected average FY23E CPI of 29 percent, we anticipate a monthly average trend of 90 bp, resulting in an average FY24F CPI of 20 percent,” stated the analysts. They further mentioned that non-food non-energy (NFNE) core inflation is projected to decline from 20.4 percent YoY in FY23 to 14.8 percent YoY in FY24.

These trends are also expected to pave the way for monetary easing in the second half of FY24. The analysts highlighted that on a 12-month forward basis, the average CPI is estimated to be 23.6 percent, indicating negative real interest rates of approximately 250 bp from the current policy rate of 21 percent. Looking ahead to an 18-month forward basis, the average CPI is projected to be 19 percent, reflecting positive real interest rates of 200 bp.

According to the World Economic Outlook, the average inflation rate projected for this fiscal year stands at 27.1 percent, with a forecast of 21.9 percent for the following fiscal year. The International Monetary Fund (IMF) report suggests that countries such as Egypt, Pakistan, and Tunisia, where loose policy stances and persistent inflationary pressures exist, should consider implementing tighter monetary policies to stabilize inflation and inflation expectations.

The World Bank has issued a warning that Pakistan’s inflation is expected to further increase to 29.5 percent in fiscal year 2023, driven by higher energy and food prices as well as a weaker rupee. However, the World Bank’s report on the macro poverty outlook for Pakistan indicates that inflation is projected to moderate over the forecast horizon as global inflationary pressures subside. The report highlights that real GDP growth is anticipated to sharply slow down to 0.4 percent in fiscal year 2023, reflecting tighter fiscal policies, the impact of floods, high inflation, elevated energy prices, and import controls. Additionally, agricultural output is expected to contract for the first time in over 20 years due to the devastating floods of the previous year. The report also mentions that the industrial sector’s output is likely to shrink due to supply chain disruptions, weakened confidence, higher borrowing costs, and increased fuel prices. This decline in economic activity is expected to spill over to the wholesale and transportation services sectors, further dampening services output growth.

The report emphasizes that poverty in Pakistan is inevitably set to increase due to challenges in the labor market and high inflation. It warns that delays in external financing, policy deviations, and political uncertainty pose significant risks to the country’s macro poverty outlook. Without increased social spending, the poverty rate for the lower middle-income group is projected to rise to 37.2 percent in fiscal year 2023. The report adds that vulnerable households, heavily dependent on agriculture, small-scale manufacturing, and construction activities, remain susceptible to economic and climate-related shocks.

The slowdown in economic activity is expected to have an impact on the wholesale and transportation services sectors, thereby suppressing services output growth. Although import controls are anticipated to lead to a narrower current account deficit of 2 percent of GDP in fiscal year 2023, it is projected to widen to 2.2 percent of GDP in fiscal year 2025 as import restrictions ease. Pakistan’s economy is currently under strain, characterized by low foreign reserves and high inflation. The tightening of policies, flood repercussions, import controls, elevated borrowing and fuel costs, diminished confidence, and prolonged policy and political uncertainty have contributed to a decline in economic activity. Despite a projected recovery, growth is expected to remain below its potential in the medium term.

In its latest report, the finance ministry acknowledged that the central bank’s contractionary monetary policy failed to rein in inflationary expectations. According to the economic outlook presented by the ministry, inflation is expected to persist within the range of 36 percent to 38 percent. This forecast aligns with market expectations and the prevailing realities. Pakistan experienced its highest recorded inflation rate of 37.8 percent in December 1973. Recognizing the gravity of the situation, the Asian Development Bank (ADB) has suggested that Pakistan provide targeted subsidies to alleviate inflationary pressures on the general population and increase the tax-to-GDP ratio in order to overcome the existing economic challenges. However, the government faces limitations due to its constrained resources. It is currently operating on debt, acquiring additional loans to repay old ones. Moreover, economic privileges granted to elite groups in Pakistan, including the corporate sector, feudal landlords, and the political class, amount to approximately $17.4 billion, equivalent to around 6 percent of the country’s economy, according to a United Nations report. The report further highlights that powerful groups exploit their privilege to acquire more than their fair share, while structural discrimination persists as individuals exhibit prejudice against others based on social characteristics. Additionally, policies often fail to effectively address resulting inequities and may even contribute to them.

Pakistan’s economy finds itself in a precarious situation, grappling with soaring inflation, limited resources, and political uncertainties. The effects of import controls, tightened policies, and a decline in economic activity have further exacerbated the challenges faced by the country. It is imperative for Pakistan to implement targeted measures such as subsidies to alleviate inflationary pressures on the general population and enhance revenue generation through an increased tax-to-GDP ratio. Additionally, addressing structural inequalities and ensuring fair distribution of resources among different segments of society are crucial steps towards achieving long-term economic stability. By prioritizing the welfare of the common people and implementing effective policies, Pakistan can navigate its way out of the existing economic turmoil and pave the way for a more prosperous future.