Inflation has slowed. That does not mean prices are lower, it just means that prices are not rising as fast as they were. However, in an inflationary wave as high and as prolonged as the present one, even the relief implied by a flowing will be welcome to the consumer, who would probably place that inflation as worse, or at least as bad, as the sluggish growth which has prevented or reduced pay raises, lost jobs, and reduced business opportunities. It also means good news for the government, which can pose as the slayer of the inflation dragon, and if the SBP monetary price committee reduces interest rates, it will allow it to save money on domestic debt servicing, thus creating fiscal space in the upcoming budget.
However, the news is particularly good for the government, because not only was May’s year-on-year inflation 11.8 percent, the fifth straight month it dropped, but there was month-on-month deflation of 3.2 percent, with prices actually coming down. However, there are still problems the government has to overcome. First of all, it has to handle the IMF, which seems bent on extending and increasing the GST, which will have inflationary effects. If inflation is slow, or there is actually deflation, an inflationary tax seems good to bring. Then the government needs to remember where inflation is slowing down. The cuts in fuel prices have been a great help, but not only does the government have no control over world oil prices, but the recent OPEC+ decision to cut production bodes ill. Then agricultural prices have fallen. That means that some of the benefit is owed to farmers, who took a hit over the recent wheat crop. The sugar lobby is already active to create another crisis by exporting production.
Under such circumstances, the IMF would tell Pakistan not to cut interest rates, or to go about it slowly. The government wants a deal with the IMF on an extended package, because it faces foreign debt servicing of $10 billion by the end of July, and cannot make it without that agreement. The IMF has told its borrowers time and again to keep up interest rates in inflationary times. However, the interest rate should be around the inflation rate, and not even the IMF will be able to keep interest rates if inflation continues to slow.
