The inflation crisis

A complex mix of economic, political and climate-induced catastrophes has compounded the inflation crisis in Pakistan

The inflation crisis


n their recent reports, the World Bank (WB), the Asian Development Bank (ADB) and the Ministry of Finance (MoF) have confirmed the alarming state of inflation in Pakistan. As millions in the country continue to grapple with inflation’s daily impact, it has been revealed that the inflation rate has reached a multidecade high. There are various methods to measure inflation, including core inflation (that looks at the change in prices of goods and services excluding energy and food), headline inflation (that measures change in the prices of everything, including energy and food), cost-push inflation and demand-pull inflation. Regardless of the approach taken, the conclusion remains consistent: inflation in Pakistan is surging and appears to be persistent in the foreseeable future.

The possibility of a drastic economic growth slowdown in the current fiscal year has compounded the inflation crisis in Pakistan. The ADB’s latest Asian Development Outlook projects Pakistan’s GDP growth to decline sharply to 0.6 percent in the current fiscal year (which ends on June 30), down from 6 percent in the previous fiscal year. The World Bank’s forecast for Pakistan’s economic growth is even more dismal, with a projected growth rate of just 0.4 percent in the current fiscal year. This combination of high inflation and low growth, known as stagflation, is adding to the hardships faced by the people of Pakistan.

Let us look at how entrenched inflation is.

Average inflation is projected to more than double from 12.2 percent in the last fiscal year to 29.5 percent this fiscal year. Headline consumer inflation jumped to 25.4 percent from July 2022 to February 2023. After easing slightly, both urban and rural energy prices recorded a sudden hike in February, reflecting the recent fuel and electricity tariff adjustments, reaching 37.1 and 37.5 percent, respectively. Inflation for transportation (55.2 percent) and food (32.2 percent) more than tripled in the first half of the current fiscal year compared to the same period last fiscal year. Transportation cost increased due to an increase in energy prices which are expected to remain high after OPEC Plus countries’ recent decision to cut crude production by 1 million barrels per day. Likewise, food prices are expected to remain high as the agricultural output in Pakistan is projected to contract for the first time in more than 20 years due to the impact of floods. In addition, the higher global food prices, together with the weaker exchange rate have added to domestic food and fuel inflationary pressures.

Now consider the three major expenditures of the majority of households in Pakistan; food, energy and transportation. Most Pakistanis have to pay a far higher share of their inelastic income for a near-inelastic consumption of food, fuel and transport. It has particularly severe impacts on poorer households that lack savings to preserve consumption amid higher prices. This is happening when economic growth (income and employment opportunities) in every sector is shrinking.

The World Bank has projected a contraction of agricultural output due to climatic factors, and the high cost of inputs. Likewise, the industrial output is expected to shrink with supply chain disruptions (lately, due to import restrictions), weakened confidence, higher borrowing and energy costs, and depreciation of the rupee. Lower industrial activities are expected to spill over to the wholesale and transportation services sectors, which account for more than 50 percent of services output. Resultantly, the economic growth is sinking, and with it, income and employment opportunities too.

The inflation crisis

The free wheat-flour distribution has taken ten precious lives so far. The government should have made direct cash transfers making the best use of the national socio-economic registry of the Benazir Income Support Programme.

One can argue that life could have been slightly easy had the governments not adopted an inconsistent approach to meet their commitments with the IMF. Unplanned and unbudgeted new subsidies and an informal exchange rate cap, saw the depletion of foreign exchange reserves, increased the budget deficit and put the IMF programme in limbo. To revive the IMF programme, the government did try possible course corrections, reduced subsidy spending, further increased energy tariffs and allowed the exchange rate to float, leading to a sharp depreciation and alignment between the interbank and open rates. It was too much, too late: too late for an instant revival of the IMF programme and too much for the consumers, producers and investors. Resultantly, consumers lost their purchasing power and investors and producers lost their confidence.

Mindful of people’s miseries, the government started supply of free wheat flour to households earning up to Rs 60,000 per month in the Punjab and the KP. It also announced cross-subsidisation of petrol for two/ three wheelers, and small car owners. Awaiting IMF’s staff level agreement, the timing may not have been right. The government may have to withdraw this to proceed further with the IMF. The free wheat-flour distribution has taken ten precious lives so far. The government should have made direct cash transfers making the best use of the national socio-economic registry of the Benazir Income Support Programme.

At the macro level, Pakistan’s economic resuscitation depends on the revival of the IMF programme. However, such revival is hindered by politically-driven slippages in fiscal policy in the context of upcoming elections, constraints on foreign exchange liquidity and uncertainties around external funding inflows, rising levels of public debt and political instability. The World Bank has warned that if the current IMF programme is not completed, and additional financing flows are not secured, a macroeconomic crisis could materialise.

Such a “macroeconomic crisis” will have huge negative implications for the poor households who are already negatively impacted by the effects of last year’s flooding and shrinking employment opportunities, including in the agriculture and the textile industry.

The inflation crisis

The World Bank has reminded that in the absence of public transfers that cover income losses or mitigate the impact of higher prices, poverty measured at the lower middle-income poverty line ($3.65/ day Rs 2,017 per capita) is projected to increase to 37.2 percent in the current fiscal year, pushing an additional 3.9 million people into poverty as compared to last fiscal year. These additional millions are on top of some 8 million who were assessed to be pushed below the poverty line after last year’s floods.

However, it is a chicken-egg situation; providing such public transfers is difficult until the IMF programme is restored. It is quite clear that the IMF, whose modern mission is to backstop countries in distress, is failing to provide any relief to the people in distress in those countries. IMF’s focus on reforms to provide much-needed macroeconomic sustainability is well acknowledged. However, such macroeconomic sustainability should not be at the cost of people living below the poverty line. According to a recent report, at least seven of the 21 debt-troubled countries have been waiting more than a year for an IMF deal since defaulting. Pakistan is one among those twenty-one.

No doubt, it is the governments of these countries that have let their people down through their bad policies, making them endure a double whammy of inflation and economic contraction. However, it can be argued that the IMF, too, has let these people down. While justifiably penalising reckless governments, it should spare the millions below the poverty line in those countries who have to make both ends meet amidst such stagflation. If the world is still serious about achieving sustainable development goals, “leaving no one behind,” then it should think of a new social contract between the developing and undeveloped countries and the multilateral institutes such as the IMF.

The writer heads the Sustainable Development Policy Institute. He tweets @abidsuleri

The inflation crisis