FeaturedNationalVOLUME 19 ISSUE # 20-21

Rising inflation, declining growth

In its Monthly Economic Update and Outlook, the Finance Ministry has reported that Pakistan’s headline inflation hovered around 22.5-23.5% in March 2024. According to the ministry, major drivers of inflation include alcoholic beverages & tobacco, housing, water, electricity, gas & fuel, furnishing & household equipment maintenance, clothing & footwear, perishable and non-perishable food items and transport.

The ministry’s view is that inflation in March was at a moderate level despite the upward revision of petrol prices and the onset of Ramadan. The Finance Division has based its optimistic conclusion on the “incumbent government’s strong resolve of curbing inflationary pressure by instituting enhanced administrative measures”. In this connection, it has cited the government’s relief package for Ramazan with increased allocation from the earlier Rs7.5 billion to Rs12.5 billion, adding that the measure would cushion the impact of heightened demand during the festive season.

It is no secret that Pakistan’s inflation dynamics to a large extent are also influenced by external factors. Emphasising this point, the ministry has noted that the Food and Agriculture Organization’s food price index, a key indicator monitoring the prices of globally traded food commodities, registered a decrease of 0.7 percent in February 2024 compared to the revised January level. The YoY index was down by 10.5 percent from its corresponding value one year ago. This decrease was primarily driven by a decline in the price indices for cereals and vegetable oils which offset the increase in the prices of sugar, meat, and dairy products.

Contrary to the current economic crisis and its severe impact on the lives of the common people, the finance ministry in its report has tried to paint an optimistic picture by saying that Pakistan’s economic and financial position “continues to improve with each passing month of the current fiscal year, attributed to prudent policy management and the resumption of inflows from multilateral and bilateral partners”. According to the finance ministry’s report, the government’s policies are easing out pressures on the gross financing needs. This is not true because the country is facing increased external and domestic financing demands in the midst of an uncertain external environment. The IMF too has taken a hard stand and is asking the government to further tighten its belt which means more tax burden on the people.

We have to evaluate the overall economic prospects in the light of current challenges. All is not well on the economic front. According to the latest report, Pakistan’s fiscal deficit rose to 2.6 per cent of GDP in the first seven months (July-January) of the current fiscal year compared to 2.3pc of last year as interest payments surged by 60pc, posing severe risks to debt sustainability and pressures on public finances. The fiscal deficit has widened by 38pc during the first seven months of FY2024.

Figures show that the total expenditures increased by 49pc to Rs7.532 trillion during Jul-Jan FY2024, up from Rs5.058tr last year. Current spending rose by 45pc primarily due to a 60pc increase in markup payments during Jul-Jan FY2024. On the other hand, the growth in non-mark-up current expenditures has been recorded at 26pc. Needless to say, rising expenditures owing to higher markup spending highlight the challenges posed by debt servicing obligations. Overall, the widening fiscal deficit indicates a persistent pressure on public finances.

There is no way out of the current economic logjam unless the government maintains strict fiscal discipline through austerity measures and revenue mobilisation efforts. The primary aim should be to balance the budget so that our dependence on domestic and foreign loans is gradually reduced. Equally important is the need to boost agriculture which is the backbone of the economy, providing employment to millions in the rural areas.

The Monthly Economic Outlook for March has found the agriculture sector outlook to be encouraging as compared to last year based on the production of Kharif crops 2023 and sowing of wheat aligned with the target in Rabi 2023-24. Also, the economic situation in the major export markets has improved. Another urgent need is to strengthen the industrial sector which suffers badly from rising input cost and high policy rate. These hurdles in the way of industrial growth need to be removed so that our products can become competitive in the world market.

The stark truth is that due to faulty policy making in the past, Pakistan has fallen far behind in the economic race as compared to its South Asian neighbours.  Our potential for growth is immense which can be more fully exploited through judicious policy making, keeping in view the opportunities and challenges offered by a fast changing global economic situation.