The May figure for inflation showed it was 37.94 percent year-on-year as measured in the Consumer Price Index. The previous highest figure was recorded last month, at 36.4 percent. This was higher than the Finance Ministry’s estimate of 36 percent, and may be the peak of the record bout of inflation. However, as inflation is likely to go down slowly, that means the common man’s agony is likely to continue. The inflation was attributed to flood damage, disruption in supply chains, devaluation ‘brought by macroeconomic balances’ and political uncertainty. The floods are wearing thin as an excuse, with lower rainfall than normal predicted for this year’s monsoon, which will use its own set of challenges. Devaluation seems likely to continue, with a simple indication being the gap between the interbank rate and the market rate, which reached Rs 27 on Thursday. That is simply not sustainable, and will lead to yet more devaluation, as the interbank rate nears the open-market rate, in the Rs 310-320 range. Making this a virtual certainty is the government’s touch in faith in the IMF, with which it hopes to conclude a deal, even though it is approaching the end of the current programme without one. Because of this, it still insists on trying to fulfil those IMF conditionalities it can.
The supply chain issues caused by the impact of the covid-19 pandemic and the Russian invasion of Ukraine, which have been compounded by the inflation presently bedevilling the USA and Europe, also cannot be even mitigated, let alone eliminated, by the government. The only policy step available to it, that of raising the interest rate, has already been taken, with the State Bank’s base rate set at a record-breaking 21 percent, and with the IMF pressing for even higher rates. However, it does not seem to be working.
An important factor is political uncertainty. This is supposed to be an election year, but the government and the Election Commission of Pakistan have combined not only to avoid holding elections to two dissolved provincial assemblies, but may not hold the remaining elections on time. There is some talk of imposing an Emergency, because that can only be done during an Emergency. Is the inflation rate high enough for the imposition of an Economic Emergency. There is nothing obvious for which the government would use its powers (basically the suspension of fundamental rights). All it can do is pray that inflation does not get further out of control. It is already close to becoming hyperinflation.