FeaturedNationalVOLUME 19 ISSUE # 30-31

The plight of inflation persists

Inflation remains a relentless adversary for the ordinary citizens of Pakistan, showing no signs of abating and leaving little hope for respite in the foreseeable future. The continuous escalation of prices exacerbates the economic challenges faced by the populace, undermining their purchasing power and quality of life. This issue has become a significant quandary, deeply impacting the daily lives of millions across the nation.

Short-term inflation, as tracked by the Sensitive Price Index (SPI), has ascended for the second consecutive week. Official statistics reveal that SPI-based inflation surged by 21.69 percent year-on-year for the week concluding on June 6, predominantly driven by escalating prices of vegetables and pulses. A week-on-week increase of 0.45 percent was also observed.

Proposed fiscal measures for the 2024-25 budget indicate a pronounced focus on indirect taxes, particularly sales tax. This emphasis is anticipated to further exacerbate inflation in the forthcoming weeks. Additionally, the annual spike in prices of certain vegetables, such as tomatoes and onions, due to heightened demand associated with Eidul Azha, continues to be a significant factor. The recent decline in petrol prices is unlikely to mitigate the overall inflationary trend due to the bullish trajectory of vegetable prices, which will further stoke inflation in the coming weeks.

In March, a decline in the SPI followed an unbroken 11-week period where inflation surpassed 40 percent, escalating from 29 percent recorded on November 8, 2023. The weekly inflation rate reached a historic peak of 48.35 percent year-on-year in early May 2023 but decelerated to as low as 24.4 percent by late August 2023, only to surge past 40 percent again by the week ending November 16, 2023.

Concurrently, the United Nations world food price index ascended for the third consecutive month in May, driven by higher prices for cereals and dairy products, which offset declines in prices for sugar and vegetable oils. The Food and Agriculture Organisation (FAO) of the UN reported that its price index, which monitors the most globally traded food commodities, averaged 120.4 points in May, marking a 0.9 percent increase from its revised April level. Nonetheless, the May reading was 3.4 percent below the level observed a year earlier.

The FAO index reached a three-year nadir in February as food prices continued to recede from a record peak set in March 2022, following Russia’s incursion into fellow major crop exporter Ukraine. The May uptick was bolstered by a 6.3 percent month-on-month rise in cereal prices, amid growing apprehensions about adverse crop conditions affecting 2024 harvests in key production areas such as North America, Europe, and the Black Sea region. Dairy prices increased by 1.8 percent in May from April, buoyed by heightened product demand ahead of the summer holidays and concerns about a potential decline in milk production in Western Europe.

Conversely, the FAO’s May sugar index plummeted, decreasing by 7.5 percent on a monthly basis, following a robust start to the new harvest in top producer Brazil. Vegetable oil prices also declined by 2.4 percent for the month, as palm oil quotations fell amid rising seasonal output. In a separate report on cereals supply and demand, the FAO projected 2024-25 world cereal production at 2.846 billion tonnes, roughly aligning with the record output of 2023-24. Increases in barley, rice, and sorghum output are expected to counterbalance declines in maize and wheat. However, the FAO cautioned that recent adverse weather conditions in the Black Sea region may necessitate a downward revision in global wheat production, a possibility not yet reflected in their forecast.

World cereal utilisation for 2024-25 is forecasted to ascend by 0.5 percent year-on-year, reaching an unprecedented high of 2.851 billion tonnes, according to the FAO. Additionally, global cereal reserves are anticipated to swell by 1.5 percent from their initial levels, culminating in a record 897 million tonnes.

The International Monetary Fund (IMF) projects that Pakistan’s average inflation will decelerate to 24.8 percent this year from 29.2 percent last year and further slow to 12.7 percent in the fiscal year 2025. The IMF also forecasts the current account deficit to increase to 1.1 percent of GDP this year from 0.7 percent last year, rising further to 1.2 percent next year. On a positive note, the IMF expects the unemployment rate to gradually decline from 8.5 percent in FY23 to 8 percent this year and 7.5 percent in the following fiscal year.

In its latest report, the IMF anticipates global headline inflation to decrease from an annual average of 6.8 percent in 2023 to 5.9 percent in 2024 and 4.5 percent in 2025, with advanced economies likely to achieve their inflation targets sooner than emerging markets and developing economies.

The World Bank’s recent report forecasts a challenging period ahead for Pakistan, characterized by high inflation and modest economic growth. The report predicts an inflation rate of 26 percent for the current fiscal year, with a slight reduction to 15 percent for the next fiscal year. Economic growth is projected at a modest 1.8 percent for the current fiscal year, improving slightly to 2.3 percent in the next fiscal year, reflecting ongoing structural and external challenges.

The agricultural and industrial sectors are expected to see growth of 2.2 percent in the next financial year, indicating a gradual recovery, though still below the potential for a country with such a vast and diverse economic base.

The World Bank highlights the current account deficit, expected to be around 0.6 percent in the next fiscal year, showing a slight improvement but emphasizing the need for ongoing fiscal management and reform. The fiscal deficit presents a more troubling scenario, with projections reaching 8 percent of GDP for the current fiscal year, anticipated to decrease to 7.4 percent in the next fiscal year. This indicates some fiscal tightening but still represents a significant challenge for achieving economic stability.

The persistent plight of inflation in Pakistan continues to be a formidable challenge for ordinary citizens, significantly affecting their economic well-being. While global and local measures provide some hope for future stabilization, the immediate outlook remains bleak. The focus on indirect taxes and the annual spike in vegetable prices, combined with global inflationary trends, exacerbate the situation. Addressing this issue requires comprehensive fiscal management and reform to ensure long-term economic stability and relief for the citizens of Pakistan.