ISLAMABAD: Pakistan’s headline inflation fell to an 11.09 per cent in July 2024, marking a near three-year low, the lowest since October 2021.
However, economists attribute the lower figure to the base effect, which they say masks underlying inflationary pressures in the economy.
The base effect occurs when the previous year’s inflation rate, or “base”, is high, distorting the current rate and making it appear lower than it might otherwise be. July’s inflation rate is significantly lower than the multi-decade high of 38pc recorded in May 2023. Last month in June 2024, it was at 12.6pc and 28.3pc in July 2023.
Independent economists, however, view the drop as very positive for the economy. They believe it would compel decision-makers to lower interest rates, ultimately helping the government manage the budget deficit and reducing the pressure of debt servicing (interest payments).
“Currently, 75 to 80pc of Pakistan’s revenues are being eaten up by servicing (interest payment) on debt, with a major chunk on domestic debt taken from commercial banks,” said senior economist Dr Ashfaq Hassan Khan, Director General of NUST Institute of Policy Studies. “It’s a positive development that inflation is on the decline. And it is happening all over the world, as commodity prices are going down,” Khan told The News.
With lower inflation, the interest rate should be further reduced and should be in the range of 9 to 10pc by the end of the year, Khan said. He added that oil prices are also declining in the international market, and “if the Middle East situation remains peaceful, it will contribute to easing inflationary pressures.”
The real interest rate, which is the current interest rate minus the inflation rate, stands at 8.4pc. It turned positive in March 2024 after a gap of 37 months. Since then, it has been rising in positive territory, prompting the SBP to consider further cuts to the discount rate.
“Maintaining a high positive real interest rate poses serious risks to debt sustainability. When real interest rates are high, the cost of borrowing increases, leading to higher debt servicing costs for the government. This can strain public finances, especially if the country already has a significant debt burden,” he opined.
As per the Pakistan Bureau of Statistics (PBS) monthly Consumer Price Index (CPI) bulletin, the drop in inflation in July 2024 was driven by a significant easing in prices for housing and utilities, which fell to 25.3pc from 35.3pc in June 2024. Prices also slowed for restaurants and hotels, dropping to 11.2pc from 11.9pc.
However, inflation increased in other areas. Food and non-alcoholic beverages saw a rise to 1.6pc from 1pc, while transportation costs accelerated to 12.2pc from 10.4pc. Clothing and footwear prices also went up, reaching 18.2pc compared to 17.8pc in the previous month.
Notably, in last fiscal 2023-24, CPI stood at 23.41pc, a decrease from 29.18pc in FY23. It was still above the government’s target of 21pc.
As per the PBS, on a month-on-month basis, CPI increased to 2.1pc in July 2024, compared to an increase of 0.5pc in June and an increase of 3.5pc in July 2023.
Furthermore, core inflation, which excludes food and energy costs, moderated to 11.7pc in July 2024 from 12.2pc in previous month and 18.4pc in July 2023.
In urban areas, inflation fell to 13.2pc from the previous month’s 14.9pc and the corresponding month last year’s 26.3pc. Rural inflation was down to 8.1pc from 9.3pc in previous month and 31.3pc in July 2023.
The Wholesale Price Index (WPI), indicating producer prices, arrived at 10.4pc in July 2024 compared to 10.6pc a month earlier and an increase of 23.1pc in July 2023. Similarly, the Sensitive Price Indicator (SPI), tracking essential item prices weekly, recorded at 15.7pc against 16.6pc in previous month and 2.93pc in July 2023.
Meanwhile, the government reiterated its commitment on Thursday to addressing the twin deficits, increasing exports, and implementing reforms in taxation, the energy sector, and privatisation of state-owned enterprises. The agenda falls under the umbrella of the International Monetary Fund (IMF), as its board is expected to meet later this month and likely approve a $7 billion, 37-month Extended Fund Facility for Pakistan.
Approval of the facility could pave the way for additional international aid and enhance investor confidence. “Managing the twin deficits, increasing exports, and implementing critical reforms in taxation, the energy sector, and the privatisation of state-owned enterprises remain our top priorities,” Finance Minister Mohammad Aurangzeb and Deputy Prime Minister Ishaq Dar expressed these views on Thursday at ground-breaking ceremony of the SECP’s new head office building in Islamabad.
The twin deficits — the budget deficit and the current account deficit — have been major challenges for Pakistan’s economy, contributing to inflation and limiting fiscal space for development projects. The government aims to reduce these deficits by increasing revenue and cutting unnecessary expenditures.
Aurangzeb said reforms were inevitable if the country was to get rid of the IMF. “Reforms are essential to get rid of IMF [...] the country will develop only through economic reforms,” he added.
Pakistan needs to repay $24.8 billion in external debt during the current fiscal year, data from the SBP released on Wednesday showed. Out of the total $24.8 billion amount, $21.2 billion is in principal repayment and $3.6 billion is interest payment.
In terms of gross financing requirements, the SBP governor stated that the total amount of $4 billion is on account of interest, and $22 billion is for principal repayment.
Highlighting the role of the private sector, Aurangzeb said it had to come forward and it was being encouraged to play their role in the country’s economy. Noting that the government would not be involved in businesses which were carried out by the private sector, the minister said positive developments had emerged with regard to the economy.
“Fitch has upgraded Pakistan’s rating [...] global confidence has improved with the IMF’s new loan programme,” he said, adding that the central bank had also reduced the policy rate, which was a direct manifestation of macroeconomic stability of the country.
Highlighting the government’s efforts to attract foreign direct investment, Aurangzeb said their job was to provide the policy framework and underscored the need for reforms in the power sector.
Aurangzeb announced that all public companies would be privatised, including the entire insurance sector. He pointed out the need to reduce dependency on banks and external borrowing, advocating for greater transparency in economic affairs, with the SECP playing a crucial regulatory role. He praised the use of technology and the simplification of the company registration process as exemplary steps forward, adding that Pakistan’s local market has substantial capacity that needs to be harnessed.
Deputy Prime Minister Ishaq Dar, speaking at the ceremony, said PM Shehbaz’s government was focused on increasing the country’s exports. “If Pakistan has a foreign debt of $130 billion, don’t worry [as] the country’s economy has a lot of potential,” Dar, who is also the country’s foreign minister, said.
Claiming that the country is on the path to development, the deputy PM said that work on development projects is continuing despite limited resources.
On the issue of reforms, Dar echoed the finance minister’s remarks and termed them “need of the hour”.
“We are facing all kinds of challenges [...] there are opportunities for economic development [and] only obstacles need to be removed [in this regard],” he said.
Ishaq Dar reassured that the government would support necessary legislation for regulations. He emphasised that the PDM government’s sole agenda was to prevent the country from going bankrupt. “In May 2023, Fitch [the US credit rating agency] had talked about Pakistani economy’s default, but we have beaten that by our actions,” Dar said. He added that “in those 18 months of our government, we done a lot to rescue the country from default”.
He emphasised Pakistan’s capacity and resilience, urging a shift away from negativity. “Yes, we have a twin-deficit issue, but these are improving. Boosting exports and managing both deficits is our agenda,” he said.
Addressing rumours of default, Dar noted that those spreading such news had failed in the past. He concluded by affirming the potential for growth and development in Pakistan, urging the nation to remain hopeful.
Dar highlighted Pakistan’s mineral wealth, worth trillions of dollars, and advised not to worry about the $130 billion foreign debt, asserting that Pakistan is an “assets solvent country” and has significant potential, Dar said.
Later, in a brief chat with journalists, Aurangzeb said Pakistan was working on launching Panda bonds, which are currently in progress. When asked about the reluctance of friendly countries to reschedule loans, he stated, “We need investment, not loans.”
Meanwhile, Bloomberg reported that Pakistan has received five bids from Chinese firms to assist in raising funds through Panda bonds, as the country advances its plans to return to global capital markets after making progress on its financial stability. The finance ministry said in a text message that the government had received three offers from law firms and two from credit rating agencies by the proposal deadline. Additionally, two Pakistani firms have expressed interest in serving as domestic legal counsels for the bond issuance. The ministry is currently evaluating the proposals before making a final decision.
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