‘Economy in trouble due to higher fuel prices, poverty, inflation, floods’

ISLAMABAD: The finance ministry has highlighted persistent challenges being faced by Pakistan’s economy, including higher fuel prices owing to the Russian-Ukraine war, increasing poverty, higher inflation, and catastrophic floods affecting the growth trajectory.

In its compliance quarterly report for securing loan of $1.5 billion from Asian Development Bank (ADB) titled ‘Building Resilience with Active Countercyclical Expenditures’ (BRACE) programme, the ministry showed that Rs208.3 billion expenses were incurred on different programmes including the Benazir Income Support Programme (BISP), Baitul Mal, fertiliser plant subsidy, Utility Stores Corporation (USC) subsidy, Kissan package, employment schemes and others in the first half of the last financial year FY2024.

The report stated that overall the impact of the Russian-Ukraine war on the economy of Pakistan is significant mainly due to high fuel prices. Fuel prices have relatively high multiplier effects and high fuel prices can cause a reduction in economic activities across different sectors. High fuel prices reduce the direct consumption of petroleum products and shrink other sectors such as electricity production, industrial demand, goods transportation, traveling, mining, construction, and many others.

The report says edible oil has the most impact on the GDP and household consumption after fuel, but it is almost double for the poor. Due to the relatively higher elasticity of oil with its price, demand shock is greater than wheat and almost double in poor households. As Pakistan remains largely dependent on imported palm oil (all from Malaysia and Indonesia), it remains highly prone to any upward shock in prices and can also cause deterioration in the healthy diet structure of children.

On poverty, the report states that the Russian-Ukraine war crisis has a serious impact on poverty that can increase the burden on already tightened fiscal space. Post Disaster Needs Assessment Report of 2022 floods, released by Ministry of Planning, Development and Initiatives stated that the national poverty rate may increase by 3.7-4 per cent by pushing 8.4-9.1 million more people into poverty due to devastating calamity. Any potential handouts or expansion of the BISP can further increase the existing high fiscal deficits.

The persistent inflation, particularly food inflation that remained highest in Pakistan’s history, recent increase in administered prices of petroleum products, electricity, and gas and continuous depreciation of the country’s currency have a negative impact on household consumption which will lead to greater poverty particularly in rural areas.

While global crisis because of the Russian-Ukraine war was expected to result in slowing down the economic growth in Pakistan, the Finance Ministry says that its adverse impact on poverty, food in security and deteriorated diet quality are likely to be more pronounced. Pakistan is prone to higher floods and it could impact its growth trajectory, the report added.