By all means, the monster of inflation is out with a bang touching 27.3 per cent in August — a 49-year high, before slightly receding to 23.2pc in September. The July-August 2022-23 inflation measured by the consumer price index (CPI) was above 26pc against 8.4pc during the same period last year. It dropped somewhat to 25.1pc in the first quarter (July-September) of 2022-23 against 8.7pc of 2021-22.

The projections for inflation in the current fiscal year range from 23pc to 30pc. This, coupled with a negligible estimated 2pc economic growth rate following historically devastating floods, could push almost 10 million people below the poverty line, according to World Bank estimates.

In such challenging times, the multilateral lenders insist more on long outstanding structural reforms than allowing relaxations to provide financial support at a time when the central bank’s foreign exchange reserves are not enough to finance more than four weeks of imports.

The New York-based Moody’s has already downgraded Pakistan’s rating to C-category (Caa1 from B3) after seven years despite strong opposition from the government because of increased government liquidity, external vulnerability risks and higher debt sustainability risks following the devastating floods.

The multilateral lenders insist more on long outstanding structural reforms than allowing relaxations to provide financial support

To Pakistan’s bad luck, international oil prices are again on an upward journey, and after a short respite, diesel prices are on the rise. Therefore, Moody’s outlook remains negative as it lowered Pakistan’s real GDP growth to zero-1pc for 2022-23 from a pre-flood estimate of 3-4pc.

It forecasts inflation to pick up to 25-30pc on average for 2022-23, compared to a pre-flood estimate of 20-25pc. “Social risks may increase as households face higher costs of living for a more protracted period, which would have attendant negative economic and fiscal implications.

Other rating agencies — Fitch and Standard & Poor’s — are currently in the final stage of their rating reviews and may or may not take a lenient view as the exchange rate downhill trend has ended. The government concedes that the risk of second-round effects of recent inflationary shocks persists, which may work themselves through the markets.

The World Bank and the Asian Development Bank have forecasted Pakistan’s economic growth rate at 2pc this year. The World Bank has warned that 2.5 to 4pc of the population, or about 10m people, could fall below the poverty line due to devastating floods and historic inflation.

The immediate impact on household welfare will come through at least four channels: loss of household income due to destroyed harvest, killed livestock, or inactivity of businesses; loss of assets, such as homes, livestock, productive equipment and household durables; shortages of food due to lost food stocks, poor harvests and rising food prices; and loss of human capital, given significant threat of disease outbreaks and food shortages, and prolonged school closures, with attendant learning losses.

In such a situation, the Bank opposed any profligacy and advocated that longstanding reforms had become all the more important for the country’s fiscal sustainability after floods and Covid-19. “Because of the catastrophic floods, there is more urgency to implement reforms for creating fiscal space for reconstruction,” it said last week.

“To achieve higher, sustained growth, reforms should target the maintenance of macroeconomic stability, improving resilience to natural disasters, increasing domestic revenue mobilisation, supporting private sector investment, raising export competitiveness, and improving the financial viability of the energy sector,” it said.

According to the World Bank, the average CPI will rise to 23pc in 2022-23 from 12.2pc in 2021-22 due to higher domestic energy prices, flood disruptions, and the weaker rupee. More recently, energy price inflation soared to 80.7pc in urban areas and 67.8pc in rural areas. Food and core inflation also reached record highs, with food inflation close to 30pc in both rural and urban areas and core inflation at 13.8pc in urban areas and 16.5pc in rural areas in August 2022.

Similarly, the wholesale price index (WPI) leapt by 41.2pc year on year in August after increasing by 38.5pc in July, partly reflecting flood-related shortages and transportation challenges. As a result, the SBP has been tightening its monetary policy to contain surging inflation and the rupee’s rapid depreciation. Since September 2021, the central bank has increased the policy rate by a cumulative 800 basis points to reach 15pc, the highest rate since the 2008 global financial crisis.

The International Monetary Fund (IMF) has advised global policymakers to keep a steady hand as storm clouds gather. Eligible countries with sound policies should urgently consider improving their liquidity buffers by requesting access to precautionary instruments from the IMF.

At the same time, the countries should also aim to minimise the impact of future financial turmoil through a combination of preemptive macroprudential and capital flow measures, as too many low-income countries were in or close to debt distress.

It agreed that fiscal policy’s priority to protect vulnerable groups through targeted near-term support was important to alleviate the burden of the cost-of-living crisis, but its overall stance should remain sufficiently tight to keep monetary policy on target. “Addressing growing government debt distress caused by lower growth and higher borrowing costs requires a meaningful improvement in debt resolution frameworks.”

Published in Dawn, The Business and Finance Weekly, October 17th, 2022

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