Pakistan has recently experienced a record hike in inflation, which has created significant concerns among businesses, and the general public. Inflation, defined as the rate at which the general level of prices for goods and services is rising, has been a persistent challenge for Pakistan's economy in recent years. Let’s look at Pakistan’s CPI index and explore the factors that caused the hike.

Pakistan’s CPI Index in 2023

The country was still reeling from the aftereffects of the pandemic when some of the most devastating floods hit the country hard. Things took a turn for the worst amidst the political instability along with futile attempts to the 2019’s stalled IMF program back on track.

CPI at its highest peak in Pakistan amidst looming economic unrest (Image credit: Bloomberg)

According to the lastest "Food Security Update" report by the World Bank, the consumer price inflation for food items in Pakistan was 45.1% in Feburary 2023 on a year-on-year (YoY) basis. Its the second highest rate after Sri Lanka where the rate stands at 54.4%. The report also highligths the wheat prices in Pakistan that witnessed a record high prices in January 2023.

A report by The Food and Agriculture Organization of United Nations (FAO) associates the price hike to stagnant production levels since 2018, massive stock losses, and highly disrupted trade flows in the wake of the 2033 floods, one of the worst in the country's history.

The latest surge in inflation has reached unprecedented levels, with the Consumer Price Index (CPI) reaching a 50-year high of 31.55% in March 2023. This development has profound implications for the country’s economy. The worse hit will be middle-income, lower-middle and low-income families. We can expect a significant increase in poverty, reduced purchasing power, and heightened economic uncertainty.

Reasons Behind the High CPI

Let’s explore the factors contributing to this record rise of inflation in Pakistan and examine potential solutions to address this pressing issue.

Supply Chain Disruptions

Pakistan, being an import-dependent economy, has been significantly affected by supply chain disruptions, which has led to a surge in prices of imported goods such as oil, machinery, and raw materials. Further decline was triggered by the devastating floods in the country that destroyed crops, and infrastructure.

High Food Prices

Pakistan's economy is heavily reliant on agriculture, and a decline in productivity is expected in the agriculture sector as high urea and fertilizer prices loom. A decline in the agricultural sector had a negative impact on the country's overall economy.

Inflation rate over the years in Pakistan is in a constant uptrend

The recent hike in food prices, which account for a substantial portion of the CPI basket, has been driven by a combination of other factors, as well such as the difference between the demand and supply of food items, import ban on raw materials, and bank’s reluctance to open LC’s.

Currency Devaluation

It's safe to say that Pakistan has been struggling with a balance of payment crisis for decades on end, and the government has devalued the currency multiple times to address the issue. The devaluation of the currency has made imports more expensive, contributing to the surge in the prices of imported goods.

Increase in Utility Prices

The government of Pakistan has increased utility prices, including electricity, and natural gas, to meet the strict IMF terms and conditions for the life-saving bailout program worth $ 1 billion. This increase in prices has a direct impact on the cost of production and transportation, leading to an increase in the prices of goods and services.

Interest Rate Hike

The State Bank of Pakistan has increased interest rates to 20% under the IMF conditions to help secure the bailout. This increase in interest rate affects the economy by lowering investments, and loans.

High-interest rates can make it more difficult for people to pay back their debts, as the cost of borrowing increases. This can lead to a rise in defaults and bankruptcies, which can have negative effects on the entire financial system as a whole.

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