Inflation in Pakistan could average 33% in the first half of 2023 beforetrending lower, and a bailout from the International MonetaryFund alone is unlikely to put the economy back on track, asenior economist with Moody’s Analytics told Reuters.
“Our view is that an IMF bailout alone isn’t going to beenough to get the economy back on track. What the economy reallyneeds is persistent and sound economic management,” senioreconomist Katrina Ell said in an interview on Wednesday.
“There’s still an inevitably tough journey ahead. We’reexpecting fiscal and monetary austerity to continue well into2024,” she added.
Pakistan government and the IMF could not reach a deal lastweek and a visiting IMF delegation departed Islamabad after 10days of talks, but said negotiations would continue. Pakistan isin dire need of funds as it battles a wrenching economic crisis.
An agreement on the ninth review of the programme wouldrelease over $1.1 billion of the total $2.5 billion pending aspart of the current package agreed in 2019 which ends on June30. The funds are crucial for the economy whose current foreignexchange reserves barely cover 18 days worth of imports.
“Even though the economy is in a deep recession,inflation is incredibly high as (result of) part of the latestbailout conditions,” Ell said.
“So what we’re expecting is that through the first halfof this year, inflation is going to average about 33% and thenmight trend a little bit lower after that,” she added.
The consumer price index rose 27.5% year-on-year inJanuary, its highest in nearly half a century.
Low income households could remain under extremepressure as a result of high inflation on account of beingdisproportionately exposed to non-discretionary items.
“Food prices are high and they can’t avoid paying forthat, so we’re going to see higher poverty rates as well feedthrough,” the economist said.
Ell said Pakistan has not has a great track record whenit comes to IMF bailouts, so infusing additional funds alone mayprove to be of little use.
“If we’re going to see any improvement, it’s going to bevery gradual. There’s just no overnight fix,” she said.
The weaker rupee, which is plumbing record lows, isadding to imported inflation while domestically high energycosts on the back of tariff increases and still elevated foodprices is likely to keep inflation high.
Moody’s expects economic growth for the 2023 calendaryear of around 2.1%.
“It is likely that we will see further monetarytightening in Pakistan to try and stabilise inflation and alsowith the weakness in the FX they might kind of intervene thereto try and force in stability, but again it’s not going to be asilver bullet,” Ell said.
Last month, the central bank raised its key interestrate by 100 basis points (bps) to 17% in a bid to rein inpersistent price pressures. It has raised the key rate by atotal of 725 bps since January 2022.
With significant recession-type conditions in Pakistan,skyrocketing borrowing costs could really exacerbate domesticdemand struggles, she said.
“You really need to see sustained sound macroeconomicmanagement, and just injecting further funds in there withoutdecent backing is not going to deliver the results that you’relooking for.”
