The International Monetary Fund (IMF) has projected average inflation in Pakistan to be 19.9% in fiscal year 2022-23, easing to 15% towards the end of F23, an expectation that comes after the headline figure was reported at an over 47-year high.
Consumer Price Index (CPI) clocked in at 27.3% in August 2022 on a year-on-year basis, the highest since the first half of 1975.
In its detailed report released after the seventh and eighth reviews under the Extended Arrangement under the Extended Fund Facility, the global lender said inflation in Pakistan would remain on the higher side because international commodity prices will be passed on to domestic consumers.
The multilateral lender projected Pakistan's real GDP growth at 3.5% in FY23.
“Core inflation is also projected to remain elevated due to higher energy prices and sizable depreciation,” the report read. “With tighter monetary and fiscal policies firmly entrenched, inflation is expected to fall significantly in FY24, supported by favourable base effects.
"The State Bank of Pakistan (SBP) is expected to reach its 5-7% inflation target range gradually with medium-term inflation slowing to 6.5%."
The report also flagged the fear of nationwide protests driven by uptick in inflation that could impact policy decisions and jeopardise the now $6.5-billion programme.
“High food and fuel prices could prompt social protest and instability. All this could affect policy decisions and undermine the program’s fiscal adjustment strategy, jeopardising macro-financial and external stability and debt sustainability," it said.
Moving on to the current account deficit, the IMF projected it to narrow to 2.5% of GDP in FY23, down from the estimated 4.7% of GDP in FY22, “reflecting monetary, fiscal, energy policies consistent with moving demand to sustainable levels, and supported by the continued commitment to a market-determined exchange rate.”
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This current account adjustment would strengthen the reserve coverage to some 2.3 months of imports by the end of the forecast horizon, up from about 1.7 months of imports at the onset of the program.
According to it, spillover effects from the war in Ukraine through high food and fuel prices, and tighter global financial conditions will continue to weigh on Pakistan’s economy, pressuring the exchange rate and external stability.
“Policy slippages remain a risk, as evident in FY22, amplified by weak capacity and powerful vested interests, with the timing of elections uncertain given the complex political setting,” the report said.
“Socio-political pressures are expected to remain high and could also weigh on policy and reform implementation, especially given the tenuous political coalition and their slim majority in Parliament.”