PAKISTAN’S economic vitals might be showing some signs of improvement, but the country is not yet out of danger. For instance, for the last four months, CPI-based inflation has been on a downward trajectory, as anticipated by the State Bank and multilateral lenders, slowing down to a two-year low of 17.3pc in April. The average inflation for the ongoing fiscal year is predicted to ease to 26pc from 29.6pc last year. Yet interest rates remain significantly high as fears of the resurgence of inflation owing to anticipated fiscal consolidation in the next budget and energy sector reforms continue to haunt the central bank. The current account balance, too, has improved in the last 10 months, with international reserves inching up as the exchange rate remains stable in spite of a strong dollar which has lately battered most Asian currencies. Still, ‘unofficial controls’ on imports remain in place to prevent a sudden build-up of demand pressure on forex reserves and the exchange rate. Tight financial conditions and the foreign exchange crunch led many large-scale manufacturers to drastically cut production, leading to job losses.

In this context, Prime Minister Shehbaz Sharif’s recent declaration of victory against inflation seems premature. The new ‘economic stability’ remains fragile and the war against inflation is a long way away from being won. That the government is desperately looking for a medium-term financial package from the IMF is a sign that the economy is not in good shape. Fiscal consolidation and rapid resolution of the energy sector corporate debt under a new IMF programme is likely to keep headline inflation higher in the near future. The last couple of years have been difficult for medium-income households. The next few years will not be easy for the majority either. It is crucial for politicians and policymakers to not misread the economic situation and to avoid any misstep that could worsen people’s plight.

Published in Dawn, May 5th, 2024