Global events and effects on Pakistan’s inflation

When the Muslim world was celebrating Eid, global capital markets were shaken, and aftershocks expected.

Although 2024 is a difficult year for global economies, major central banks are still waiting for their lagged effect on inflation and the effect it has on economies.

One of the major central banks – the US Federal Reserve – has been unable to achieve the objective to decrease inflation to its targeted target because of strong consumer spending and fiscal stimulus.

The rate was 0.5% on average from 2010 to 2021. It will now vary from 3% to 5% depending on various projections and current scenarios. It signifies the end of the “free money” era. It will undoubtedly impact investment behavior as well as other economies.

In the United States, core inflation stands at 3.8%, with headline inflation slightly lower at 3.5%. A more accurate measure, the six-month average of headline inflation, is at 3.24%, while the six-month average of core inflation, a critical factor for Federal Reserve decisions, is at 3.90%, nearly double the target.

The U.S. labor market outperformed expectations by adding 303,000 jobs in March 2024, keeping the unemployment rate steady at 3.8%. The U.S. GDP grew by 3.4% in the last quarter of 2023, although growth is expected to slow to 2.1% in the following quarter.

Presently, markets forecast two rate cuts in 2024, a stark contrast to earlier predictions of seven. The PMI remains above 50, signaling expansion, bolstered by fiscal stimuli in sectors like technology, semiconductors, and green energy.

Chinese central bank and government are providing fiscal and monetary stimulus to support economic growth and inflation. It successfully reached its target, but the current fiscal target is 5% which looks difficult because of real estate sector issue (which is 25% of its GDP), high local bodies debt and high base year affects.

China’s PPI number is still in negative territory and hit -2.8%.

Europe is in a precarious position due to its reliance on global economic happenings, limited fiscal space, and sluggish growth, complicating the European Central Bank’s ability to maintain high interest rates.

With inflation at 2.4% as of March 2024, the ECB might consider rate pivot its policy instance.

Japan is currently able to move from NRIP policies because its core inflation reached 2.8% while central bank expected increase in wages by 5.3%. However, the market is not confident about its future inflation because of structural challenges, high debt to GDP ratio and age population.

Brent crude oil prices have surged, driven by robust PMI readings, OPEC+ supply restrictions, multiple global conflicts, and anticipated oil supply shortfalls in 2H24.

Several factors have pushed the UST 10-year yield to 4.57%, up nearly 70 basis points since the end of 2023.

The components of long-term Treasury yields are projected inflation, risk premium, and short-term real interest rates.

It has been declining since the 1990s, but in the second half of 2020, it started to rise again. The dollar index has risen by 4.53% to 105.97 in 2024.

Due to significant purchases by central banks, the price of gold has also increased.

Additionally, it shows that investors and other institutions suspect major central banks are losing control over monetary policies to fight inflation because of unmanageable fiscal deficits, high debt levels, and geopolitical issues that hinder international trade.

Developing and oil-importing nations are facing balance of payments crises, local currency depreciation issue, challenges in accessing external financing, and imported inflation issues due to the strong dollar, high U.S. real interest rates, and elevated oil prices.

The largest portion of Pakistan’s balance of payments – roughly 31% of all imports in FY24 – comes from energy imports. Due to low economic growth, low exports, and challenges obtaining external borrowing due to low credit ratings, Pakistan is currently experiencing a shortage of foreign exchange reserves.

Over the next three years, Pakistan will be required to pay nearly $23 billion in interest and principal during each fiscal year.

The recent WPI reading indicates that inflation is shifting from food to the energy sectors, although Pakistani stock markets are still celebrating the real interest rate position from the previous month’s reading.

Pakistan’s circular debt has skyrocketed despite the government passing along higher tariffs to consumers.

In the first half of the year, Pakistan paid nearly Rs4.2 trillion (almost 89% of domestic interest payment), which is approximately 49.2% of current expenditure and 61% of total revenue, including provincial share.

Such high domestic interest payments will fuel inflation, though they will take approximately 12 to 18 months to materialise. Pakistan’s domestic debt and liabilities increased by 8.84% in FY 24, or nearly Rs3.5 trillion, and reached Rs43.16 trillion.

The high cost of commodities, the depletion of foreign exchange reserves, the lack of external financing, the high global interest rate environment, the large portion of current expenditure that goes toward paying interest domestically, and the high cost of external debt are main threats to Pakistan’s inflation. I see that the State Bank of Pakistan might still wait and see. I could be wrong.

The article does not necessarily reflect the opinion of Business Recorder or its owners