Inflation,as measured by the year-on-year increase in the consumer price index, was 4.1 percent in July, which represents something of an uptick in June, when it was 1.2 percent. June was the culmination of a downward trend which started as soon as monthly inflation was recorded in May 2023, at 39 percent. Perhaps the uptick in inflation was the reason what the State Bank’s Monetary Policy Committee did not revise its benchmark rate downwards from 11 percent. The MPC is obviously treading cautiously, with the unintended side-effect of stifling growth. The government can also expect not to make further savings on domestic debt servicing, as interest rates are unlikely to go further down any time doon. True, the business community wants the interest rate to come down even further.
However, the recent rally on the Stock Exchange was not caused by the interest rate remaining unchanged, but because of the trade deal with the USA. Though that deal had a number of imponderables, stock exchange investors felt upbeat enough about the economy to be bullish, apparently reasoning that the deal left Pakistan’s economy about as competitive with its regional competitors as it could hope to be. In particular, the fact that Pakistan’tariff was 19 percent, while India’s 20 percent, Bangladesh’s and Sri Lanka’s 20 percent, meant that Pakistan would not be seriously undercut in the USA just because of a tariff differential. Though the margin is paper-thin, if anything, it is Pakistan which has the advantage. That news was enhanced by the recent reduction in the petrol price, which means that one of the main causes of imported inflation, international oil prices, was not working against anti-inflationary efforts.
One of the main worries of the government is that no one seems to have noticed the fall in inflation. The primary reason must be the failure of the economy to pick up, of incomes to rise, and thus for disposable incomes to increase, leading to greater production to meet the increase in demand.Though inflation has been beaten back, no one seems to be giving the government enough credit. However, it can take a little comfort from the fact that the past deflation was just that, and not the precursor of an economy heading towards the sort of recession that is both politically and economically cataclysmic, not to mention socially ruinous.
