Written by Seema Makhija, CNN
Pakistanis thought they had won their biggest fight against inflation when Prime Minister Imran Khan vowed to rein it in when he took office last year. But that fight might be over.
The balance of payments crisis that paralyzed the economy for the past nine months has now caught up with the country, with inflation running at 6.5% in October, as measured by the Consumer Price Index. This will prevent Khan from balancing the budget, a key part of his government’s ambitious policy.
The official reason for the crash in the rupee is “currency depreciation as a result of the current account deficit as well as higher international oil prices.” The key problem is that the finance ministry relies heavily on foreign loans.
“Foreign debt payments have totaled nearly 70% of the federal budget, with high commitments from the United States, Saudi Arabia and the UAE,” said Raja Muhammad Farooq, the director of economic studies at the Pakistan Institute of Development Economics (PIDE).
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“A balance of payments crisis is also caused by energy shortfalls. The energy shortages have led to rising prices in production costs. Inflation is driven by domestic energy prices and this increases market demand. If demand decreases the prices of the export products also fall,” Farooq explained.
Adequate electricity is crucial for Pakistan’s textile exports. These fell 2.5% in the first six months of 2018. Inflation also affected the food sector, which accounts for 25% of the country’s GDP. Chicken and fish prices have risen 37% this year, the price of potatoes has gone up by 40% and cooking oil prices by 20%.
Consumer price inflation might have looked positive to most Pakistanis when it hit 0.9% in February, but for analysts it’s crucial information for the government that is making tough economic decisions.
“It’s an important factor for the government to monitor because there is an expectation from the public that government intervention, if they cannot figure out a way to reduce the fiscal deficit and debt payments, will lead to higher inflation and also affect the currency and the exchange rate,” Farooq said.
Pakistan’s currency, the rupee, was depreciated 11.5% against the dollar since Khan took power last year. Currency depreciation can cause a sharp increase in consumer prices as imported raw materials become more expensive. There has also been a sharp fall in the value of the Pakistani rupee against the dollar, although the Pakistani rupee also has a very low relative value against other currencies.
Although Pakistan’s unemployment has fallen to 5.2% in August 2018 from 6.7% in January 2018, economists are worried that the unemployment rate might revert to its January 2017 level, with 6% being the level at which the government had earlier predicted stability.
Pakistan’s Central Bank has pegged the exchange rate of the rupee to the dollar to prevent a sharp depreciation. That means it has many options to stabilize the currency.
And some economists are now saying that the government has a chance to finally bring down inflation to single digits for the first time in decades.