Positive Turn: Pakistan's Inflation Takes a Welcome Dip After Seven Months

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Pakistan's inflation rate saw a welcome drop for the first time in seven months during June, according to recent figures released on Monday by the Pakistan Bureau of Statistics. The year-on-year inflation rate for the previous month was recorded at 29.4 percent, a notable decline from the record 38 percent reached in May.

This positive development comes amidst significant economic challenges for the country, stemming from years of financial mismanagement, compounded by the COVID-19 pandemic, a global energy crisis, and devastating floods that engulfed approximately one-third of the nation last year.

In an effort to alleviate the mounting foreign debt burden, Pakistan recently secured a $3 billion standby deal with the International Monetary Fund. However, to fulfill the demands of this deal, the government had to eliminate popular subsidies on gas and electricity, which had previously softened the impact of the cost-of-living crisis.

With elections scheduled for October, the focus of political campaigning is likely to revolve around promises of developmental initiatives and commitments to address the economic issues at hand. Nevertheless, the latest data reveals that the brunt of the economic turmoil is still being felt by lower-income Pakistanis, as food prices surged by 40 percent and transport costs rose by 20 percent in June 2022.

A World Bank report published in April projected the country's poverty rate to rise to 37.2 percent this year. Furthermore, the continuous depreciation of the rupee against the dollar has further exacerbated the problem by driving up the cost of imported goods. As a response, Pakistan's central bank held an emergency meeting and raised its benchmark interest rate to a record-high 22 percent.

Economist Ashfaque Hasan Khan, who previously served as a special secretary at the Ministry of Finance, expressed concerns that the recent easing of inflation might be short-lived. He predicted that inflation could increase in July, given the state bank's decision to raise the interest rate and fix it at 22 percent. He also highlighted the potential risk of further inflation if the currency is devalued due to an understanding between the government and the IMF.

Economist Farrukh Saleem emphasized that while the temporary relief from inflation is noteworthy, it should not divert attention from the underlying systemic issues. He identified substantial government borrowing as a major problem that could indirectly impact people by exacerbating poverty, inflation, and unemployment in the country.

Despite the recent IMF deal providing a boost to investor confidence, Pakistan has failed to meet any economic growth targets for the fiscal year 2022-23, with GDP growth languishing at a mere 0.3 percent. Foreign exchange reserves have also dwindled, with only $3.5 billion available, equivalent to roughly three weeks of imports.

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