ISLAMABAD: Pakistan will miss the inflation target of 21 percent set for the current fiscal year and will remain in the range of 23-24 percent, suggested the Economic Survey 2023-24.
During July-April fiscal year 2024, the Consumer Price Index (CPI) inflation rate remained at 26 percent, compared to 28.2 percent recorded in the same period last year. This indicates a better trend of slowing inflation.
Year-on-year, CPI inflation recorded at 17.3 percent in April 2024, down from 20.7 percent in March 2024 and 36.4 percent in the corresponding month last year. Therefore, the CPI inflation experienced a month-on-month decline in April 2024, falling to 0.4 percent from an increase of 1.7 percent recorded in the previous month.
Pakistan’s headline inflation decelerates further to 11.8% in May 2024
Inflation has become the most significant economic challenge in Pakistan. This problem did not arise suddenly but developed over the last three years. Globally, inflationary pressures have been observed after COVID-19.
Domestically, measures taken to address high and increasing fiscal and current account deficits resulted in double-digit inflation on a year-on-year basis since August 2019. The issue was highlighted in November 2021 when both food and non-food components of inflation surpassed single digits.
The average CPI inflation rate spiked to 29.2 percent in fiscal year 2023, and by May 2023, the year-on-year inflation rate had soared to 38 percent. This affected all CPI components, especially food and energy, which surpassed core inflation. The Russia-Ukraine conflict in fiscal year 2023 triggered a global economic crisis, causing substantial disruptions in food and energy supply chains.
Pakistan’s depleted foreign exchange reserves led to currency depreciation, exacerbating inflation. The floods in 2022 also resulted in significant economic damage, severely impacting the agriculture sector and disrupting the supply of perishable essential items, leading to increased prices. Political and economic uncertainties further fueled excessive aggregate demand, compounding inflationary pressure.
The survey noted that inflation was mainly driven by a gap between demand and supply, caused by excessive demand for goods and services compared to supply. This was influenced by increased government spending and growing consumer demand.
Additionally, factors such as rising energy prices, higher import costs, and wage pressures contributed to inflation. Fluctuations in the exchange rate, caused by economic factors, also increased costs for imported goods and services, adding to inflationary pressure. Pakistan heavily relies on imports for essential commodities like oil and food. While the prices of these commodities began to decline, they remained higher than prepandemic levels during the current fiscal year.
The conflict in Gaza and Israel has the potential to escalate and affect the broader region, which is responsible for 35 percent of global oil exports and 14 percent of gas exports. Ongoing attacks in the Red Sea, an important trade route handling 11 percent of international trade, along with the war in Ukraine, could cause new supply shocks impacting global recovery and leading to increased food, energy, and transportation costs.
Container shipping costs have already increased, and the volatile situation in the Middle East raises concerns. Further economic fragmentation may hinder cross-border commodity flows, intensifying price volatility. Additionally, extreme weather events such as floods and droughts, compounded by the El Nino phenomenon, could further raise food prices, worsen food insecurity, and challenge global efforts to control inflation.
In the medium term, the inflation rate (i.e., fiscal year 2025 and fiscal year 2026) is projected to normalize due to improvements in the agriculture sector and anticipated favorable global and domestic conditions, the survey noted.
Copyright Business Recorder, 2024