Pakistan’s inflation peaked at 38% in May 2023, dropping to 4.9% by early 2024, following an IMF bailout. The SBP raised interest rates to combat inflation, which declined but did not lead to lower prices for consumers. Despite reduced inflation numbers, the poverty rate remains high at 40.5%, highlighting ongoing economic struggles. Experts emphasize that although inflation rates are improving, real prices and purchasing power continue to be a concern for many Pakistanis.
In May 2023, Pakistan experienced a staggering consumer price index (CPI) inflation rate of 38 percent, which has now dramatically decreased to 4.9 percent. This change follows a critical period when Pakistan was on the edge of default and consequently secured a bailout from the International Monetary Fund (IMF). High inflation not only distresses individuals and businesses due to increased costs but can also trigger a cycle where higher prices lead to demands for higher wages, further escalating inflation. In an effort to control inflation, the State Bank of Pakistan (SBP) raised interest rates to an unprecedented 22 percent in June 2023, a strategy aimed at curbing demand and consequently reducing inflationary pressures.
By June 2024, the SBP implemented its first interest rate cut in four years, reducing it by 150 basis points to 20.5 percent as inflation figures showed a significant decline to 11.8 percent. However, despite these positive developments in inflation metrics, the broader economic situation remains distressing, with the World Bank reporting a poverty rate of 40.5 percent and the country ranking poorly on the World Economic Forum’s gender report.
It is crucial to clarify the concept of disinflation, which is a reduction in the rate of inflation while prices continue to rise, albeit at a slower pace. For instance, although overall inflation decreased, the prices of essential goods continue to reflect higher costs compared to previous years. Hence, while statistics indicate an easing of inflation, many Pakistanis find themselves still grappling with rising prices and diminished purchasing power.
Former Finance Minister Miftah Ismail noted that although inflation rates decreased, the actual prices consumers face have not reverted to previous lower levels. Consequently, despite reduced inflation rates from 24 percent last year to about 9 percent this year, purchasing power continues to decline, as wage growth has not kept pace with inflation. Ismail further highlighted that previous political decisions exacerbated inflation by artificially capping the exchange rate, which prompted a series of rapid price hikes.
Additional factors in the tapering of inflation include decreased international commodity prices and a stabilization of the Pakistani rupee following the IMF agreement. Factors contributing to the current economic atmosphere involve restrictive import policies and reduced overall demand in the economy, resulting in slower price increases.
Experts caution that ongoing global tensions may impact future inflation rates, as political instability could disrupt supply chains and energy production. However, with the IMF frameworks in place and appropriate fiscal strategies being employed, there exists the potential for inflation trends to continue declining into 2025, suggesting a need for concerted efforts to bolster economic activities and improve income opportunities for the populace.
In 2023 and early 2024, Pakistan faced severe economic challenges characterized by unprecedented inflation rates and a looming threat of default. The situation was exacerbated by political decisions that artificially maintained the currency rate against market realities and significant global commodity price fluctuations due to the Ukraine war. The role of the IMF was pivotal in stabilizing the economy, with the central bank’s interest rate movements being the primary tool for controlling inflation. Recent statistics indicate a gradual reduction in inflation rates, although the socioeconomic conditions for many citizens remain dire.
In summary, Pakistan’s fluctuating inflationary landscape presents a complex challenge. While the recent decrease in inflation rates is encouraging, it does not translate into immediate improvements in living standards for the population, who are still facing higher prices than in previous years. The government and economic policymakers must focus on sustainable solutions that will enhance purchasing power and foster economic development to fully address the lingering effects of high inflation on the populace.
Original Source: www.dawn.com
