Addressing inflation

A large chunk of inflation earlier this year was attributed to tough IMF conditions

New government data says that despite the rupee recovering significantly against the dollar, inflation actually went up, rising past 30% again. Annual inflation rose to 31.4% in September against 27.4% in August, and was up by 2% month-on-month in September, compared to 1.7% in August. Still, there is widespread hope that the crackdown on dollar hoarding and ensuing improvements in the exchange rate will help stabilise prices. This is because if prices are consistent or declining abroad, they will automatically decrease here because of the stronger rupee. Given that petroleum products — which are almost entirely imported — have a massive impact on inflation, a successful crackdown could have very quick results.

Meanwhile, recent reforms to restrict abuse of Afghan Transit Trade should help reduce Pakistan’s import bill and balance of payments gap by several billion dollars, according to several independent experts — $2.5 billion has become a frequent conservative estimate. There is also optimism that the knock-on impact of oil price changes will also help reduce prices in commodity areas that are not otherwise import-dependent simply because of the reduction in transportation costs — food is the obvious standout.

A large chunk of inflation earlier this year was also attributed to the tough IMF conditions. However, the impact of many of those conditions has already been absorbed, meaning that new spikes are unlikely. This will also help the overall rate decline. But whether or not it will decline enough to put the government on track for its annual inflation target of 21% — compared to 29% in the first quarter of the current fiscal year — remains to be seen. And then, there is also concern over what will happen when interest rate is cut. Currently at record highs to help check inflation, the high rate also discourages investment, which is critically needed to meet broader economic goals. Unfortunately, any new investment will also be inflationary, bringing us back to square one.

Published in The Express Tribune, October 9^th, 2023.

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