As Citizens Struggle For Food In Pakistan, Inflation Hits A 50-Year High

Pakistan's inflation rate reached 35.37 per cent year-on-year in March, the highest in nearly 50 years, according to data released by the Pakistani government on Saturday.

The average inflation rate in the cash-strapped Pakistan for the past year was 27.26 per cent, and month-on-month inflation was 3.72 per cent.

Pakistan government is under pressure to meet International Monetary Fund (IMF) conditions to unlock a much-needed bailout as the country's economy has been pushed to the brink of collapse due to years of financial mismanagement and political instability.

Pakistan's economy has been further hit by a global energy crisis and devastating floods that submerged a third of the country in 2022.

The country needs billions of dollars in financing to service existing debt, but foreign exchange reserves have dwindled, and the Pakistani rupee is in free fall.

Poor Pakistanis are bearing the brunt of the economic turmoil, and at least 20 people have been killed in crowd crushes at food distribution centers since the start of the Muslim fasting month of Ramadan.

On Friday (31 March), at least 12 people were killed in a crowd crush in Karachi at a factory distributing Ramadan alms.

Pakistan is home to more than 220 million people, and tough tax reforms and pushing up utility prices are necessary to unlock another tranche of a $6.5 billion IMF bailout and avoid defaulting.

According to Pakistan's Finance Ministry, inflation is expected to stay at "elevated" levels "owing to market frictions caused by relative demand and supply gap of essential items, exchange rate depreciation and recent upward adjustment of administered prices of petrol and diesel", reports MoneyControl.

The headline inflation in Pakistan is also impacting the medium and small industries.

As one of the largest cultivators of mangoes in the world, Pakistan’s business owners are losing out on profits due to the high transportation costs and weakening demand, thus dented selling prices.

Last year’s floods that impacted one-sixth of the population added to the losses of the farmers. Other businesses, aligned to manufacturing, our unable to garner investment and thus cannot expand and upgrade. 

The Russia-Ukraine war has also taken a toll on the country’s current account deficit.

Pakistan’s exports have been stagnant, but in 2022, their CAD increased five-fold, as compared to 2021, due to the rise in oil prices. This consequently impacted the gross reserves that halved between December 2021 and June 2022.

The Pakistani rupee is also in free fall, going from a little above 150 to one American dollar, to more than 283 today.

Hit by inflation, the central bank has hiked the interest rates, but that will take its toll on credit access and cost of doing business. Thus, in the short-term, Pakistan’s economy will be in dire straits, for there will be inevitable suffering to exit the vicious loop they are in.

Given the war in Ukraine coupled with a slowdown that is engulfing the world economy, experts in Pakistan anticipate financing and investment pressures, outflow of capital, and supply disruptions.

Food and energy inflation, assuming it persists, would create its own set of problems, given the cost cannot be passed on to the consumers beyond a limit.

Another concern for Pakistan’s economy stems from its polity. With Imran Khan not holding back, experts fear this could usher social unrest and riots further impacting investor confidence.

In the short-term, the bigget hindrance to Pakistan’s economic growth is its polity itself. The government of the day could be put under pressure to continue the subsidies, furthering the downward spiral, or having incentives to suit the army of other political groups.

The politically-motivated subsidies could cost both fiscal discipline and reform windows, aided by the International Monetary Fund (IMF). 

Pakistan’s external debt is a huge mess as well.

About to touch 40 per cent of its GDP this year, it adds to the economic uncertainty. In the next three months alone, Pakistan owes more than $8 billion to external lenders.

Overall, more than one-third of the external debt is owed to China. While debt restructuring with creditors continues, Pakistan has reached out to the international community, requesting financial assistance.

Already, around $9 billion has been pledged, with the majority share coming from Islamic Development Bank ($4.2 billion). 

This morning, news came that Pakistan’s central bank reserves had dropped to $4.34 billion, half of what they were six months ago.

Starved for development between fuel imports and debt servicing, the economy of Pakistan is performing worse than most junk bonds. In the short-term, inflation will be on the rise, demand will be hit as consumers reel under increasing costs, and GDP growth is expected to be less than 4 per cent for the financial year of 2023.

Also Read: Explained: Why Pakistan Is An Economic Basket Case