Pakistan’s economy is facing a plethora of political, socio-economic problems including natural disasters of flood and cyclones over the past two years. Year 2023 started with unbearable inflation rates coupled with terrorist attacks in Peshawar and Karachi, and tropical cyclone Biparjoy. Is it the first time Pakistan’s economy has experienced such issues? Most of the readers will respond negatively, but they will agree that the intensity of the problems has accentuated.
Among the current problems, inflation has drawn a lot of attention from the media and public as it affects poor and marginalized communities the most. Pakistani economy faced Consumer Price Index (CPI) inflation of 38 percent in May 2023, which raised average inflation to 29.2 percent during July-May FY23 (SBP, 2023). Surprisingly, it has reduced in June 2023 to 29.4 percent as per Inflation Monitor (SBP, 2023). However, based on the recent macroeconomic facts of Pakistani economy from Trails and Turmoil book, one can expect poor macroeconomic performance for the upcoming year of 2024. First, the budget deficit has reached the level of PKR 6.4 trillion which shows deviation of 40 percent from the targeted budget deficit. Second, during 2023 we are expected to miss the target of Federal Bureau of Revenue (FBR) by roughly PKR 270 billion. In addition, we have set a high target of PKR 9.2 trillion for FBR revenues in FY24, which shows a growth of 28 percent. Third, swelling of current expenditure over 30 percent in the latest budget for year 2024 (Zaidi, 2023).
Pakistani nation got relief from IMF in July just before going to have a sovereign debt default. Although, Pakistan reached to staff-level agreement on a 9-month Stand-level agreement (SBA) with IMF, but predictions on above facts and monetary ineffectiveness, excessive money printing through ‘long term Open market Operations (OMO’s)’, lack of business confidence and fiscal discipline, and rising debt are showing alarming catastrophic economic situation next year. The projected CPI inflation, even if Pakistani economy grows at 3.5 percent with other stable conditions, will be about 26 percent (Zaidi, 2023). In addition, uncertainty for oil prices is further aggravating the economic situation. The couple of oil price hikes in August were back-breaking for lower- and middle-income class people in Pakistan. However, recently the caretaker government is trying to tame the inflation by cutting fuel prices through a price-control mechanism (Shahid, 2023).Such relief can be a starting point to better economic situation but based on not so good performance since last year or looking at pessimistic side, one can foresee expected poor macroeconomic performance, unfortunate crop losses from monsoon or natural disasters, and pressure from upcoming fiscal revenue targets may lead to implementation of post-elections new taxes on electricity, oil, and gas prices, which can also aggravatefurther inflation rates.
Given the scope and scale of the socioeconomic and environmental problems, there is every chance that Pakistan is moving towards hyperinflation. Economist defines hyperinflation as a rise in prices for goods and services of more than 50% each month in an economy (Nugent, 2022). The question that comes to one’s mind is when that could happen? To answer that question, one can use sophisticated econometric analysis to project the likelihood of hyperinflation,but it goes beyond the objective of this blog.
In this article, I am interested in focusing on two questions. First, are we (Pakistani economy) the first to face hyperinflation? Second, what are solutions or policies to be implemented for solving this problem if we reach there? To answer the first question, one can investigate IFRS Development report on Hyperinflationary economics. The list does not include Pakistan, but it includes Argentina, Ethiopia, Haiti, Islamic Republic of Iran, Lebanon, South Sudan, Suriname, Turkey, and others. Pakistani economy is still far to reach hyperinflationary economies list, but it is really a turning point for current caretaker and next government to decide what policies they will be using to control it. If things are not handled properly, Pakistan may also end up in this list in the coming years. As a proverb, hope for the best but prepare for the worst.
To answer the second question, we should look back in history, where one can find numerous examples of economies that faced seemingly insurmountable inflation yet were able to recover within a few years from it. For instance, Dornbusch and Fischer (1986) study explains four successful stabilization case studies of Germany, Austria, Poland, and Italy for controlling hyperinflation and stabilizing their economies. Although, these countries belong to different geographic regions as compared to Pakistan in a totally different era, they did face similar economic conditions. Following Dornbusch and Fischer (1986) study and future expected situation, I propose few following key solutions only if Pakistani economy is on road to hit hyperinflation. We need monetary and structural reforms for balancing fiscal side, avoid cutting subsidies for poor, preparing a good weather forecast warning system to avoid any climate induced disaster through effective utilization of flood aid. Along with that, devising adaptation policies such as crop insurance policies not only to protect farmers on land but also protecting fisher communities living near the coastal waters.
Above reforms are only possible if we have political will, and lower corruption levels. Transparency Index report 2023 provides evidence of deteriorating conditions in Pakistan based on corruption perception index (Ahmed, 2023).One viable way to achieve political stability is conducting free and fair elections whenever that happens. However, every political party should consider a key question, how they are going to deal with inflation before it gets to hyperinflation.
Apart from the above solutions, there is a possibility of applying numerous other policies and solutions which can bring back economy on the right track. As S. Akbar Zaidi, the Executive Director of the IBA, says “The existing structures of power are unable to address or resolve Pakistan’s many issues. The entire relations and nature of Pakistan’s political economy need a complete overhaul. Perhaps this is the only alternative which has not yet been tried.”
Disclaimer: The views discussed above are solely author’s reflection on the current issues of Pakistan, which don’t associate with any institution.
— The writer is Assistant Professor at Institute of
Business Administration (IBA).