Pakistan’s economic scenario remains fraught with challenges, with inflation at the forefront of concerns. Despite recent efforts to stabilize the economy, inflation continues to pose a significant threat, driven by both domestic and external factors.

The Sensitive Price Indicator (SPI) recently showed an uptick, reversing previous gains, while the broader Consumer Price Index (CPI) has slowed but remains elevated. The central bank’s cautious monetary policy reflects the ongoing struggle to balance inflation control with the need for economic growth. As the country grapples with these issues, the outlook for inflation remains uncertain, raising questions about the effectiveness of current economic policies.

The Sensitive Price Indicator (SPI), a weekly measure of inflation in Pakistan, saw a rise of 0.30% on a week-on-week basis, primarily driven by an increase in food prices, reversing the previous week’s decline. According to the Pakistan Bureau of Statistics (PBS), the inflation rate jumped to 17.96% in the week ending August 8, compared to the same week in the previous year, reflecting a persistently high double-digit inflation rate. During the week, out of the 51 commodities tracked, the prices of 23 items (45.10%) increased, while the prices of seven items (13.72%) decreased, and 21 items (41.18%) remained unchanged. The year-on-year inflationary trend showed a significant surge of 17.96%, with gas charges for the first quarter leading the rise with a staggering 570% increase. Other notable increases included a 142.48% rise in onion prices, and spikes of up to 42% in the prices of essential commodities such as gram pulse, moong pulse, garlic, powdered milk, gents’ sandals, shirting, beef, salt powder, mash pulse, cooked daal, energy savers, and long cloth.

On the broader inflation front, the Consumer Price Index (CPI), which is the benchmark for monthly inflation, slowed to a three-year low of 11.1% in July, down from a multi-decade high of 38% in May 2023. This deceleration in inflation is expected to continue, with projections suggesting it could fall into single digits by the end of the current fiscal year. This trend is likely to lead the central bank to reduce its policy rate to 15-16% by the end of FY25, down from the current rate of 19.5%.

In a policy statement to a parliamentary panel, State Bank of Pakistan Governor Jameel Ahmad outlined the central bank’s stance on inflation risks, monetary policy, growth outlook, and the sustainability of the external sector. Despite criticism from the panel over the tight monetary policy and its impact on economic growth, he emphasized that the bank would maintain a tight policy stance and keep its policy rate in positive territory to address inflation risks. While he projected inflation to remain in the range of 11.5-13.5%, he warned that prices might surge in the coming months due to inflationary budgetary measures and potential increases in global energy prices stemming from the Middle East crisis.

Despite incorporating recent developments into the projected inflation range for the current year, he cautioned that the government’s pursuit of expansionary fiscal policies and unmet foreign loan obligations could drive inflation higher than anticipated. This would further strain Pakistan’s already limited foreign reserves. Consequently, the central bank plans to maintain a cautious monetary policy stance in the near term. Nonetheless, he reassured lawmakers that the foreign debt repayment crisis had been resolved. However, this optimistic outlook can be questioned.

His confidence largely stems from recent debt rollovers secured from China, Saudi Arabia, and the UAE, as well as the anticipated approval of a new IMF deal later this month. This deal is still contingent on the extension of maturity periods for $4.4 billion in Chinese bank loans. He is hopeful that foreign reserves could rise from around $9 billion to $13 billion by the end of the fiscal year, even after meeting all debt repayment obligations. However, this optimistic view belies the fragile state of economic recovery and the subdued medium-term growth outlook. Accelerating growth without addressing the fiscal deficit and public debt could worsen the crisis.

The Asian Development Bank (ADB) has also provided a sobering assessment. In its latest Asian Development Outlook report, the ADB maintained its economic growth forecast for developing Asia and the Pacific at 5%, slightly up from 4.9%. However, Pakistan faces a more challenging outlook. The ADB predicts that while Pakistan’s inflation rate has decreased from 38% to 11.8%, it will remain elevated. The bank also forecasts a reduction in the country’s debt by 7%, from 77% to 70%.

Despite these projections, the ADB highlighted that a significant portion—62%—of Pakistan’s revenue will be allocated to debt repayment during the fiscal year 2024-2025. While global food prices are expected to ease, potentially helping to moderate inflation, some regions may still face high food inflation due to adverse weather conditions and export restrictions.

ADB Chief Economist Albert Park emphasized the strong economic growth in Asia and the Pacific compared to the second half of the previous year. However, he warned that policymakers must address several risks that could impact this positive outlook, including electoral uncertainties, interest rate decisions, and geopolitical tensions. For Pakistan, the challenges are even more pronounced due to ongoing economic strain and the need for continued reform. The ADB’s report suggests that improvements in domestic and external demand in Southeast Asia, along with stronger-than-expected growth in Central Asian economies like Azerbaijan and Kyrgyzstan, are supporting regional economic prospects. In contrast, China is expected to maintain steady growth at 4.8%, driven by ongoing recovery in services consumption and stronger-than-expected exports and industrial activities.

While the broader region shows promise, individual countries like Pakistan must navigate significant economic hurdles, including the need to maintain fiscal discipline and manage inflationary pressures.

Inflation remains a persistent and complex challenge for Pakistan, threatening to derail the country’s fragile economic recovery. While recent measures have brought some relief, the risks of rising inflation due to expansionary fiscal policies, unmet foreign loans, and global economic uncertainties cannot be ignored. The central bank’s cautious approach, though necessary, highlights the difficult balancing act between controlling inflation and fostering growth. As Pakistan moves forward, maintaining fiscal discipline and addressing inflationary pressures will be crucial to ensuring long-term economic stability. Without careful management, the progress made could quickly unravel, deepening the economic crisis and prolonging the journey toward recovery.