With inflation skyrocketing to 11.5% in November, it is unlikely that the common man, unable to cover living costs, will feel any relief anytime soon. That the Consumer Price Index (CPI) has jumped a whopping three percent in a month, the highest increase recorded in the past 13-odd years, is an indication of how prices have reacted to major changes in the economy. The IMF is dictating how Pakistan’s economy will function going forward, imposing stringent nonnegotiable and unavoidable conditions that are severely inflationary. Periodic increases in power tariffs and petroleum products will continue to add to the cost of production of all businesses and industries, which is in turn passed on to consumers. Rupee depreciation has reached record levels, recording a historic low of 176 against the dollar last month, only to recover slightly. With the IMF’s restriction on using foreign exchange reserves that are predominantly built up by borrowed money, the rupee will remain under pressure for the foreseeable future. Pakistan being a net importer of goods and services, this does not bode well for the current account deficit and will cause further inflation as there is a limit how much the import bill can be reduced with many essential items must be bought from other countries. A significant amount in taxes is also raised through imports of goods and services as well, revenue that the government cannot let go of. Owing to these limitations, there is a need to increase exports and FDI to reduce the gap.
The State Bank of Pakistan (SBP) has started to take measures to curb inflation with monetary policy tightening. The discount rate has been jacked up to 8.75 percent from 7 percent in the space of three months while also increasing banks’ Cash Reserve Ratio (CRR) one percentage point from 5 to 6 percent, for the first time in 13 years to soak up excess liquidity from the market. There is a strong expectation that another 100 basis points rise in SBP’s policy rate is imminent in its next monetary policy statement (MPS). However, the effects of these monetary measures will take a few months to reflect in the CPI. By the time that happens, the underlying inflationary pressures will continue to persist and may become difficult to overcome.
