Inflation Falls to 33-Month Low in July

Pakistan’s headline inflation fell to 11.09% in July 2024, marking a 33-month low and the lowest rate since October 2021.

Key Points:

• Base Effect Influence: Economists attribute the lower inflation figure primarily to the base effect, which can distort current rates by comparing them to high rates from the previous year. This can make inflation appear lower than it might otherwise be. In July 2023, inflation was at 28.3%, while in June 2024, it was 12.6%.
• Economists’ Views: Despite the base effect, independent economists view the drop positively, anticipating it could lead to lower interest rates. This could help the government manage the budget deficit and reduce debt servicing pressures, which currently consume 75-80% of Pakistan’s revenues.

Statements from Economists:

• Dr. Ashfaq Hassan Khan:
  • Director General of NUST Institute of Policy Studies, Dr. Khan highlighted the importance of declining inflation. He suggested that interest rates should be reduced to 9-10% by the end of the year, contingent on stable oil prices and peaceful conditions in the Middle East.

Inflation Breakdown:

• Sectoral Changes:
  • Housing and Utilities: Prices fell to 25.3% from 35.3% in June 2024.
  • Restaurants and Hotels: Prices dropped to 11.2% from 11.9%.
  • Food and Non-Alcoholic Beverages: Prices rose to 1.6% from 1%.
  • Transportation Costs: Increased to 12.2% from 10.4%.
  • Clothing and Footwear: Prices increased to 18.2% from 17.8%.
• Overall Trends: The CPI increased by 2.1% on a month-on-month basis in July 2024, compared to 0.5% in June and 3.5% in July 2023. Core inflation, excluding food and energy costs, moderated to 11.7% from 12.2%.
• Urban vs. Rural Inflation:
  • Urban inflation fell to 13.2% from 14.9% in the previous month and 26.3% in July 2023.
  • Rural inflation decreased to 8.1% from 9.3% in the previous month and 31.3% in July 2023.
• Wholesale Price Index (WPI): Dropped to 10.4% from 10.6% in June 2024 and 23.1% in July 2023.
• Sensitive Price Indicator (SPI): Recorded at 15.7%, down from 16.6% in June 2024 and up from 2.93% in July 2023.

Government Commitments and Economic Outlook:

• Reforms and Deficit Reduction: The government reiterated its commitment to addressing twin deficits, increasing exports, and implementing critical reforms in taxation, the energy sector, and privatisation of state-owned enterprises. These efforts align with the International Monetary Fund (IMF) agenda, with a $7 billion, 37-month Extended Fund Facility expected to be approved later this month.
• Public Statements:
  • Finance Minister Mohammad Aurangzeb: Highlighted the importance of economic reforms and reducing dependency on loans.
  • Deputy Prime Minister Ishaq Dar: Emphasized Pakistan’s economic potential and the need to boost exports and manage deficits. He reassured that the government’s agenda aims to prevent the country from going bankrupt and highlighted Pakistan’s mineral wealth.
• Panda Bonds: Pakistan is working on launching Panda bonds, receiving bids from Chinese firms to assist in raising funds. This move aims to enhance financial stability and investor confidence.

The reduction in inflation, though influenced by the base effect, is seen as a positive step towards economic stability, potentially leading to lower interest rates and easing fiscal pressures.