VSA steady rise in inflation could haunt many economies this year, possibly leading them to downgrade their outlook for economic growth, amid concerns over rising international oil prices (supply disruptions ) and the risk that interest rates will rise faster than expected so far.
According to “The Economists” and “The Trading Economics”, Pakistan ranks 4th among the most inflationary countries with a consumer price index (CPI) reaching 12.2%. According to the sources above, the highest inflation in the world in the last period is in Turkey, where the inflation rate is currently 54.4%. Meanwhile, Argentina ranks second with an inflation rate of 50.7%, followed by Sri Lanka with 15.10%.
The purpose of this article is to explain the reasons behind the soaring inflation rate in Pakistan. I have also compiled in the table below the data of the main countries that have recently had the highest CPI. The table also presents their recent GDP growth and the performance of other economic indicators such as: (i) the central bank’s policy rate; (ii) GDP per capita and GDP per capita in terms of purchasing power; (iii) the parity of the currencies against the US dollar and their percentage change against the USD following the base of June 30, 2021. After that, I also proposed a regional analysis using the same indicators.
Before going into details, if we take the example of Turkey, their national currency, the Turkish lira, has been devalued in a rampant way since last year in June 2021, which, according to our estimates, represents a 70% depreciation against the greenback. Its impact was later realized in their IPC.
While the CPI was in the 19-20% range, a massive devaluation caused a drastic change in the CPI, which was recorded at 54.44% last month.
A similar case of high prices was observed in the Argentine and Russian economies. Since the Russian invasion in Ukraine, the oil market seems to be the most volatile. We saw Brent crude hit a 14-year high at 139 a barrel last week, after which oil is currently trading below $100 a barrel.
In Pakistan, according to the Pakistan Bureau of Statistics (PBS), the month of February 2022 saw a further reversal in the prices of consumer items as inflation slows down to 12.2% from the high rate of 13%. over two years from January 2022 over one year. year comparison. This happened mainly due to a drop in the prices of non-food items. However, foodstuffs recorded a surge in prices which stood at 14.3% and 14.6% respectively in urban and rural areas.
Due to the above fact, the question arises how Pakistan can survive in the current situation. This is not the first time that oil prices have risen to this level. During the 2011-2013 economic situation, the price of oil crossed an average of 108 USD/barrel; however, the average currency was 94 PKR to one USD.
For the current financial year 2021-22, the Pakistani government in its annual planning report had set the target inflation rate at 8%. However, the government has not met this target since the start of the current fiscal year, and it has become out of reach for the government to reduce it since the reading soared into double digits in November 2021.
Since then, the State Bank of Pakistan (SBP) has also revised its CPI projection upwards to a range of 9-11%. Although this is the revised inflation target, it is the fourth month in a row that the inflation rate has remained above the expected level. The average CPI over the first eight months from July to February rose by double digits, to 10.5%. Across Pakistan, a spike in inflation continues to hit the masses hard and make living standards vulnerable for most people.
In reality, the middle class is being hit hard by rising prices and profit, the result of poor governance at both the top and bottom levels.
Nevertheless, considering the regional analysis, the four economies have an almost similar structure and are all in the development phase. Yet, the impact of inflation in the region is mainly seen in Pakistan and Sri Lanka, while India and Bangladesh saw their CPI at a rate of 6.0% and 5.86%, respectively.
The reason is obvious, they have a stable monetary parity. It can be noted that Sri Lanka is suffering from an internal economic crisis. Despite this, all countries in the region probably import identical products and face similar prices. Yet, it is clear from our analysis that one of the major reasons for inflation in Pakistan is due to the devaluation of the Pakistani Rupee.
As I have already stated in my previous article, according to our estimate, the impact of the exchange rate on inflation is 1.25% for every ten devalued rupees.
From the above analysis, we have also discovered that the economy which has experienced a strong devaluation of its national currency consequently bears the burden of high inflation.
Pakistan has undoubtedly faced troubling economic issues as evidenced by the various macroeconomic indicators.
To tackle the serious economic problem, we must consider economic stabilization policies to address the fundamental problems that have made Pakistan’s economy a permanent borrower.
Moreover, a well-thought-out monetary and exchange rate policy is the need of the hour to limit the surge in inflation.
The author is a senior tax advisor