Recently the price spiral has not spared not a single country across the globe, and our country has also been badly affected by the same, which was mostly because of the rising commodities prices, sharp depreciation of the Pakistan rupee, and bad governance of the government or untimely decisions where people at the helm of affairs only raising slogans to show their sympathy with the common man on grounds purchasing power after passing day tarnished badly.
Inflation could not be assessed in isolation was the major obstacle to curbing inflation since long has been ever decreasing value of domestic currency against the US dollar. Since August 2018, when the parity started from 124 rupees to a dollar to the current level of Rs 282 where it climbed to Rs 298.93 on May 11, the record highest level. This mammoth depreciation has been enough to skyrocket the price of every product sold in the country, from pulses to sugar to flour to edible oil to motorbikes, vehicles to refrigerators to mobile phones, etc.
It is import-driven inflation mostly because we are sitting on a double-edged sword-rising price of commodities across the globe, which started creeping up because the Russia and Ukraine war badly dampened the economies, especially countries like Pakistan. Rising commodities globally did not spare the import bill, which recorded a historic high of $71 billion in FY22, which translated into a huge current account deficit of $17.28 billion. In order to plug the deficit, the country has to rely on external debt borrowing; this pressure caused deep scarring in the run-up of the domestic currency. After borrowing, the country has to pay the external debt, which creates pressure on the domestic currency, weakening more than expected, thereby inflating the prices of commodities.
Currently, prices of commodities like coal, iron, wheat, and other products have gone down sharply in the global market, but the impact on the domestic market shows a different kind of picture due to every rising price of the dollar versus the rupee. Raw material and other product prices went up on a daily basis, and it was difficult for the economic managers to set the selling price of the products; output on the decline, and the latest numbers from the government clearly hint industrial production has suffered badly. During May 2023 the industrial output declined by 14%, while in 11 months of FY23, it recorded a decline of 9.87%.
Inflation hit not only the industrial output but also the common man; while talking to people belonging to the salaried class and small business houses, they claimed that rising electricity bills, gas bills, petrol and water bills have now clipped the pocket by at least 50% to 60% whereas couple of years back the share of these heads on our pocket was around 25% to 35%. Besides this rising flour, sugar, tea, pluses, rice and edible oil just absorbed our remaining monthly earnings.
The government should strenuously check the profiteers and hoarders because the country has ample production of wheat, sugar and rice but these forces appeared more powerful and the state has not been challenging them to give comfort. “To curb high inflation in Pakistan during FY24, the government should adopt a comprehensive approach. Focusing on fiscal discipline and reducing budget deficits will help control excessive spending and money printing”, said Ali Nawaz, CEO of Chase Securities.
Addressing supply-side constraints, particularly in agriculture and infrastructure, can stabilize prices. Additionally, energy reforms to reduce inefficiency losses bringing down energy prices and structural changes to improve the business environment, will enhance productivity and mitigate inflationary pressures. “A coordinated effort involving both monetary and fiscal measures alongside long-term reforms is essential to tackle Pakistan’s inflation challenges effectively”, said Ali.
While interest rates can be a tool to tackle inflation in Pakistan, they alone are not a comprehensive solution. Raising interest rates can help reduce consumer spending and investment, thereby curbing demand-side inflation, he pointed. However, inflation in Pakistan is mostly driven by supply-side constraints and structural issues, such as currency devaluation, energy prices and food production inefficiencies. To effectively address inflation, the government should adopt a multifaceted approach, including fiscal discipline, supply-side interventions, and targeted structural reforms, to address the root causes of inflation and promote sustainable economic growth.
“Inflation is expected to ease in the second half of FY24 and it is expected that the average inflation for FY24 will be in the range of 22%-24% and inflation dropping below 20% in 4QFY24”, Ali said. “In my view, inflation will remain around 20% in FY24; however, increases in gas and energy prices and passing on the impact of it to the end consumer will further push inflation to the north, ” said Yousuf Saeed, head of research at Darson Securities.
Interest rates are unable to control inflation due to food prices, which are considered necessary items and an undocumented economy where people hold more money and have high purchasing power. In order to curb inflation, “I think govt. have to control prices of food and improve the supply situation”, Yousuf said.
Shan Saeed, Global Chief Economist, Juwai IQI Malaysia, real estate advisor with presence in more than 20 countries from Kuala Lumpur said that the government should now try to focus on controlling their expenses and lowering the turnover of money supply. One of the reasons inflation cannot be tamed is that money turnover is high due to a consumption-oriented economy.
“With higher saving rates in the banks, the government should run a campaign in social media or press to encourage people to save money in order to leverage from higher rates”, he said.
Pragmatically speaking, an increase in interest rates could not have a huge impact on inflation, firstly, exogenous factors in the global economy beyond the control of the government and SBP. Secondly, policy error was made by SBP on Jan 28/2020 with a discount rate at 13.25% which was not required. Every 25 to 50 to 75 basis point increase takes 12-15 months to make an impact on the economy to contain inflation. Regulatory errors were made on many occasions which could not help the economy at the macro level and inflation continued to show its head as policy error costs got higher. Consumers suffered, inflation remained serious, stubborn and pugnacious for the next 12-24 months, Shan said. “I don’t foresee inflation to stay low in Pakistan till 2025. We can expect inflation to come down gradually by Q3-2025. GDP will meander around 1-2% till 2025 with weak macroeconomic stability and payment pressure from the donors”, he said.
Muhammad Awais Ashraf, CFA, Head of Research at Foundation Securities, said that the “tight monetary policy, efficient FX market along with targeted subsidies to improve the supply of food products would help in reducing inflation”
“Interest rate alone cannot solve the problem of inflation given higher proportion of cash in circulation (around 29%) and significance reliance on consumption-led remittances”, he said.
“We expect easing fuel and international commodity prices amid high base effect would push FY24 inflation downwards from FY23 highs. However, high food inflation and 2nd round effects of high FY23 inflation would keep inflation above long-term average. Thus, our forecast of FY24 inflation is ~21%”, Awais Ashraf said.
