Pakistan experienced a historic surge in its annual inflation rate, reaching a record high of 38% in May. This alarming increase can be attributed to supply shocks, currency devaluation, and the absence of effective measures to curb hoarding and profiteering. With general elections scheduled later this year, the ruling coalition faces significant challenges in defending its policies, as the population grapples with the growing struggle to make ends meet.

The Pakistan Bureau of Statistics (PBS) reported that the Consumer Price Index rose by 38% compared to the previous year, surpassing both previous inflation records and the Ministry of Finance’s projections by a wide margin. Inflationary expectations remain high, although there is hope that the rate will decrease to single digits in the next fiscal year.

The impact of inflation has been particularly harsh on rural areas, where the average increase in the prices of goods and services rose by 42.2% last month. The majority of Pakistan’s population still resides in rural regions. In urban areas, the inflation rate reached 35.1%, according to the PBS, indicating that politicians will face significant challenges during the election campaign. Food inflation soared to 52.4% in rural areas and remained at 48.1% in cities, according to the PBS. The minister of state for finance attributed the higher inflation in Pakistan to global commodity prices, subsidy withdrawals, increased electricity and gas prices, as well as currency devaluation. She also expressed concerns over the insufficient efforts by the governments in Punjab and Khyber-Pakhtunkhwa to curb inflation. Excessive note printing has also contributed to rampant inflation. SBP Deputy Governor Dr Inayat Hussain highlighted that currency circulation in Pakistan has increased by 600% over the past 13 years, reaching Rs8.8 trillion. Furthermore, the currency in circulation as a percentage of GDP rose from 8.7% in 2010 to 11.3% in 2022, indicating a growth in the size of the informal economy in Pakistan.

Despite setting the highest interest rate in Pakistan’s history at 21%, the central bank was unable to control the surging inflation, which reached a record high of 38% in May. The State Bank of Pakistan (SBP) is expected to announce the next monetary policy after the budget, providing insights into the government’s future priorities. Alarming inflation rates above 40% were observed in eight consumer price groups, including alcoholic beverages and tobacco, which skyrocketed to 124% due to increased taxes. However, the Federal Board of Revenue faced a substantial revenue shortfall of Rs428 billion during the first 11 months of the fiscal year. Virtually all consumable goods experienced significant price hikes in recent months, reflecting the magnitude of the inflationary pressures.

Data from the July-May period of the current fiscal year revealed an average inflation rate of 29.2%, significantly surpassing the official target of 11.5% set before the floods. The government and provinces faced challenges in managing the rapidly rising inflation, partially attributed to higher global commodity prices, as stated by Dr. Aisha. Sustained efforts will be crucial to address this persistent inflationary pressure and restore economic stability in Pakistan.

Over the span of three decades, successive governments and the State Bank of Pakistan (SBP) have consistently failed to rein in inflation, leading the country to the edge of a hyperinflationary cycle. A lack of coordination between fiscal and monetary policies, coupled with the central bank’s inability to maintain inflation within the target range, has exacerbated the situation.

The situation worsened after the rupee continued its slide against the US dollar. In March, inflation reached alarming levels, with the most vulnerable segments of society experiencing rates close to 50 percent. Instead of addressing the root causes, policymakers have resorted to blaming external factors, while disastrous decisions and poor governance fuel the inflationary spiral. In March, the inflation rate reached a staggering 35 percent, one of the highest levels ever recorded. For the most vulnerable segments of society, inflation is even closer to 50 percent. Rather than acknowledging their own poor decisions that have contributed to inflation, policymakers on both the fiscal and monetary sides have chosen to use the excuse of a commodity super cycle to explain rising prices.

These policymakers have made a series of disastrous choices, such as continuously disrupting supply chains and accumulating debt to cover fiscal deficits resulting from ineffective governance and an inability to expand the tax base. With tax collection unable to keep up with inflation, the deficit will only continue to grow. Consequently, the government will be forced to borrow more in order to bridge this ever-increasing gap.

The recent surge in global commodity prices has played a significant role in the evolution of inflation over the past few quarters. However, the decision to subsidize fuel prices in the face of rising costs is a clear example of poor judgment, as it encourages consumption at a time when prices are already on the rise. Moreover, precious foreign exchange reserves have been spent without considering the strong indications of a global monetary contraction, which not only increases the cost of borrowing for Pakistan but also makes accessing debt more challenging.

Due to our failure to learn from past mistakes, policymakers stubbornly persisted in maintaining an overvalued rupee and depleting precious foreign exchange reserves to artificially keep the rupee’s value low against the American dollar. As a result, our foreign exchange reserves significantly declined, leading policymakers to resort to rationing the reserves. This restriction in foreign exchange availability for importing raw materials and intermediate goods had a detrimental impact on supply chains across all industries.

Industries, deprived of necessary imports, began reducing production and eventually shutting down, leading to a rise in unemployment. The disruption of the food supply chain due to the inability to import animal feed, seeds, and other critical inputs had a cascading effect. Even though the global surge in commodity prices subsided, the local supply chain disruptions caused shortages, exacerbating inflation.

Rather than addressing the underlying issues in the supply chains, the government further allocated resources to subsidized food and handouts, resulting in increased dependency and, more recently, tragic loss of life due to poorly planned and self-serving actions. Meanwhile, the central bank continues to print more money without recognizing that it does not resolve supply chain issues. Fiscal policymakers refuse to expand the tax base and instead burden an already taxed population, discouraging investment and formal economic activities.

With unabated food inflation and a breakdown in supply chains, an additional wave of inflation is expected to occur as wages increase. The upcoming budget may rightly raise salaries and pensions, further expanding the fiscal deficit. The inability to broaden the revenue base will eventually lead to increased borrowing by the government to bridge the deficit, further worsening the debt spiral. This failure to expand the tax net results in the most vulnerable segments bearing the burden of taxes through inflation, making inflation the harshest form of taxation.

The current path, paved with good intentions and incompetence, is leading us toward disaster. Good intentions alone cannot rectify the consequences of bad policies and a series of poor decision-making. If we continue on this path, the possibility of hyperinflation cannot be ruled out, further eroding the purchasing power of the most vulnerable segments and driving them deeper into poverty.