Pakistan’s inflation is projected to gradually decrease over the next two fiscal years, according to recent analysis by AKD Securities Research. The firm anticipates an average inflation rate of 6.3% in FY26 and a further decline to 4% in FY27. These forecasts are predicated on expectations of improved domestic food production, stable global oil markets, and moderated adjustments to energy pricing.
Muhammad Awais Ashraf, director of AKD Securities Research, outlined these projections in a report released this week. The analysis focuses on the key factors influencing Pakistan’s economic outlook and provides a detailed assessment of potential risks to the predicted downward trend in price increases. The forecasts are significant as Pakistan continues to navigate a period of economic stabilization following recent challenges.
Understanding the Projected Decline in Inflation
The anticipated easing of inflation stems from several interconnected factors. AKD Securities Research highlights the expectation of better agricultural yields as a primary driver, suggesting increased food supply will help curb food price inflation, a major component of the overall consumer price index. Additionally, the report assumes international oil prices will remain relatively subdued, limiting imported inflationary pressures.
Food Supply and Agricultural Output
Pakistan’s economy is heavily reliant on agriculture, and fluctuations in crop production directly impact food prices. Recent government initiatives aimed at improving irrigation and providing subsidies to farmers are expected to contribute to increased yields. However, the actual impact will depend on weather patterns and the effective implementation of these policies.
Global Commodity Prices
The global economic environment plays a crucial role in determining Pakistan’s import costs, particularly for energy. A stable or declining trend in oil prices would alleviate pressure on the country’s foreign exchange reserves and contribute to lower domestic fuel costs. Geopolitical events and global demand will continue to be key determinants of these prices.
Furthermore, the projections incorporate an expectation of reduced frequency and magnitude of adjustments to electricity and gas tariffs. Periodic price hikes in these essential utilities have historically been a significant contributor to headline inflation in Pakistan. The government’s ability to manage subsidies and improve the efficiency of the energy sector will be critical in achieving this moderation.
However, the report emphasizes that these projections are not without risk. Several factors could derail the anticipated decline in prices. Fiscal discipline, or the lack thereof, is identified as a major concern. Increased government spending without corresponding revenue increases could fuel demand-pull inflation.
Global energy supply shocks represent another significant threat. Unexpected disruptions to oil or gas supplies, stemming from geopolitical instability or natural disasters, could quickly reverse the trend of stable prices. The ongoing conflict in Ukraine and tensions in the Middle East continue to pose risks in this regard.
Perhaps most concerning are the potential impacts of climate change. Pakistan is highly vulnerable to extreme weather events, such as floods and droughts, which can devastate agricultural production and lead to sharp increases in food prices. The increasing frequency and intensity of these events pose a long-term threat to price stability. These climate-related risks are particularly relevant given Pakistan’s recent history of devastating floods.
The State Bank of Pakistan (SBP) has been actively pursuing a tight monetary policy to combat inflation, raising interest rates significantly over the past year. According to the SBP, this policy is aimed at curbing demand and anchoring inflation expectations. The effectiveness of this approach will be crucial in determining whether the AKD Securities Research projections materialize.
Recent economic data indicates a mixed picture. While the monthly inflation rate has shown some signs of easing in recent months, it remains elevated compared to historical levels. The Pakistan Bureau of Statistics reported a consumer price index (CPI) increase of 26.8% year-on-year in April 2024, down from a peak of 38% earlier in the year, but still a substantial figure. This highlights the ongoing challenges in controlling price increases.
The government is also engaged in negotiations with the International Monetary Fund (IMF) for further financial assistance. Successful completion of these negotiations and adherence to the IMF’s reform agenda are considered essential for maintaining macroeconomic stability and controlling inflation. The IMF typically emphasizes fiscal consolidation and structural reforms as key conditions for its support.
The secondary keyword, economic growth, is also closely tied to the inflation outlook. While lower inflation is generally positive for economic activity, excessively tight monetary policy could stifle growth. Striking a balance between controlling prices and supporting economic expansion is a key challenge for policymakers.
Another related factor is exchange rate stability. A depreciating Pakistani rupee increases the cost of imported goods, contributing to inflation. The SBP’s efforts to manage the exchange rate and maintain adequate foreign exchange reserves are therefore crucial in the fight against rising prices.
Looking ahead, the next key data release will be the CPI figures for May 2024, scheduled to be published by the Pakistan Bureau of Statistics in early June. These figures will provide a more up-to-date assessment of the inflation trend. The outcome of the ongoing IMF negotiations and the government’s fiscal policy decisions will also be critical factors to watch. Ultimately, the realization of these projections hinges on a complex interplay of domestic and global factors, and significant uncertainties remain.
