Inflation in Pakistan could average 33% in the first half of 2023 before trending lower. However, a bailout from the International Monetary Fund (IMF) alone is unlikely to put the economy back on track, a senior economist with Moody’s Analytics told Reuters.
“Our view is that an IMF bailout alone isn’t going to be enough to get the economy back on track. In an interview on Wednesday, the economy needs ongoing and sound economic management,” senior economist Katrina Ell said.
“There’s still an inevitably tough journey ahead. We’re expecting fiscal and monetary austerity to continue well into 2024,” she added.
Pakistan and the IMF could not reach a deal last week, and a visiting IMF delegation departed Islamabad after ten days of talks but said negotiations would continue. Pakistan is in dire need of funds as it battles a wrenching economic crisis.
An agreement on the ninth review of the program would release over $1.1 billion of the total $2.5 billion pending as part of the current package agreed upon in 2019, which ends on June 30. The funds are crucial for the economy, whose current foreign exchange reserves barely cover 18 days’ worth of imports.
“Even though the economy is in a deep recession, inflation is incredibly high as (the result of) part of the latest bailout conditions,” Ell said.
“So what we’re expecting is that through the first half of this year, inflation is going to average about 33% and then might trend a little bit lower after that,” she added.
The consumer price index rose 27.5% year-on-year in January, its highest in nearly half a century.
Low-income households could remain under extreme pressure due to high inflation due to being disproportionately exposed to non-discretionary items.
“Food prices are high, and they can’t avoid paying for that, so we’re going to see higher poverty rates as well feed through,” the economist said.
No Overnight Fix
Pakistan does not have a great track record regarding IMF bailouts, so infusing additional funds alone may be of little use.
“If we see any improvement, it will be very gradual. There’s just no overnight fix,” she said.
The weaker rupee, plumbing record lows, is adding to imported inflation. At the same time, domestic energy costs on the back of tariff increases and still elevated food prices are likely to keep inflation high.
Moody’s expects economic growth for the 2023 calendar year of around 2.1%.
“We will likely see further monetary tightening in Pakistan to try and stabilize inflation. With the weakness in the FX, they might intervene there to try and force in stability, but again it’s not going to be a silver bullet,” Ell said.
Last month, the central bank raised its key interest rate by 100 basis points (bps) to 17% to rein in persistent price pressures. In addition, it has raised the key rate by 725 bps since January 2022.
She said that with significant recession-type conditions in Pakistan, skyrocketing borrowing costs could exacerbate domestic demand struggles.
“You need to see sustained sound macroeconomic management, and injecting further funds without decent backing will not deliver the results you’re looking for.” (Reuters)
 alone is unlikely to put the economy back on track, a senior economist with Moody's Analytics told Reuters.){kind=link}