Inflation outlook

Consistently rising inflation may haunt many economies this year, which can lead them to trim their economic growth outlook, amidst worries of rising international oil prices (supply side disruptions) and the risk that rate of interest might rise quicker than assumed so far.

According to “The Economists” and “The Trading Economics”, Pakistan ranked 4th amongst top inflationary countries with the Consumer Price Index (CPI) clocking in at 12.2 percent. As per above sources, the highest inflation in the world as of latest period is in Turkey, where the inflation rate is currently at 54.4 percent. Meanwhile, Argentina ranks second with a 50.7 percent inflation rate, followed by Srilanka with 15.10 percent.

The purpose of this article is to explain the reasons behind the soaring rate of inflation in Pakistan. I have also compiled in the table below the data of the top countries which have the highest CPI recently. The table also showcases their recent GDP growth and the performance of other economic indicators such as: (i) central bank’s policy rate; (ii) per capita GDP, and per capita GDP in term of purchasing power; (iii) currency parity over US dollar and their percentage change over USD following the base of June 30th 2021. After that, I have also put forth a regional analysis using the same indicators.

Before getting in to detail, if we take the example of Turkey, their domestic currency Turkish Lira has rampantly de-valued since last year June 2021, which as per our estimates is a depreciation of 70 percent against the greenback. Its impact was realized later in their CPI.

From having CPI in the range of 19-20 percent, massive devaluation has caused the CPI to change drastically, which was recorded at 54.44 percent last month.

A similar kind of case of high prices has been observed in the Argentine and Russian economy. Since the Russian invasion in Ukraine, oil market seems to be most volatile. We saw Brent crude oil touched to a 14-year high at 139/barrel last week, following that, oil is presently trading below $100/barrel.

In Pakistan, as per Pakistan Bureau of Statistics (PBS) the month of February 2022 saw a new turnaround of prices of consumer items as inflation eases up to 12.2 percent from two year high rate of 13 percent from January 2022 on a year-on-year comparison. This happed essentially due to a decline in the prices of non-food items. However, food items recorded a surge in prices which stood at 14.3 percent and 14.6 percent in urban and rural areas, respectively.

Owing to the above fact, question arises of how Pakistan can survive in the current situation. It is not the first time that oil prices have shot up at that level. During the 2011-2013 juncture, oil price crossed USD 108/barrel on average; however, the average currency was PKR 94 against one USD.

For the ongoing fiscal year 2021-22, the government of Pakistan in its annual planning report, had set the rate of inflation target at 8 percent. However, the government has failed to meet this target since the start of current fiscal year, and it has gone out of reach for the government to curtail it ever since the reading shot up to double digits in November 2021.

Since then, the State Bank of Pakistan (SBP) has also revised its CPI projection upwards to a range of 9 percent to 11 percent. Despite being the revised inflation target, it is the fourth month in a row when the inflation rate has remained above the projected level. The average CPI during the first eight months Jul-Feb elevated in double digits which stood at 10.5 percent. Across Pakistan, a surge in Inflation continues hitting the masses hard and making living standards vulnerable for most of the people.

In reality, the middleclass are badly being hurt owing to a hike in prices and profiteering, which is a result of bad governance both in the upper tier and lower tier.

Nevertheless, considering the regional analysis, all four economies having nearly similar structure and all are in their developing stage. Yet, the inflation impact in the region is mostly observed in Pakistan and Sri Lanka, while India and Bangladesh witnessed their CPI at a rate of 6.0 percent and 5.86 percent, respectively.

Reason is obvious, they have stable currency parity. It may be noted that Sri Lanka is suffering from an internal economic crisis. Despite that, all regional countries probably import identical products and has to face similar prices. Yet it is clearly seen from our analysis, one of the core reasons for inflation in Pakistan is due to the devaluation of the Pakistani rupee.

I have asserted it before in my previous article, as per our estimation, the exchange pass through in inflation is 1.25 percent per ten rupees worth devaluation.

From the above analysis, we have also found out that the economy which experienced a high devaluation in their national currencies consequently are bearing the brunt of high inflation.

Pakistan has undoubtedly been confronting worrying economic problems as noticeably viewed in the various macroeconomic indicators.

To tackle the severe economic problem, we need to look at economic stabilization policies to fix fundamental issues that have made the Pakistani economy a permanent borrower.

Moreover, a well thought-out monetary and exchange rate policies are the need of the hour to restrict the soaring inflation.

The writer is a senior tax consultant