Washington/Islamabad:
Soaring inflation in Pakistan, which accelerates to 27.3 percent in August — a 47-year record — could lead to “social protest and instability” in the cash-strapped country, the International Monetary Fund (IMF) warned.
Inflation in Pakistan, as measured by the consumer price index (CPI), accelerated to 27.3 percent in August this year — the level last observed in May 1975 — even now with the full impact of unprecedented flooding on the prices of food and other commodities is not yet clear. come.
The ill effects of the floods and the resulting disruption to the food supply will be reflected in the inflation figures for September, which could lead to the rate being much higher than that of August.
“High food and fuel prices can lead to social protest and instability,” the IMF said in a summary of its seventh and eighth assessments.
The IMF’s board of directors approved the seventh and eighth revisions of Pakistan’s stalled $6 billion program earlier this week, and the State Bank of Pakistan (SBP) received the much-needed 1.16 down payment two days later on Wednesday. billion dollars to direct the cash flow. has lifted the country’s economy out of the crisis.
The IMF, which has also asked the country to take various measures after receiving the loan, released the funds after Pakistan gave in to several demands from the global lender for fiscal tightening.
The deal required the government to raise the petroleum tax to Rs 30 per liter on petrol by September 1 and Rs 15 per liter on diesel in three phases.
The government on Wednesday raised the levy to Rs 37.50 per liter on petrol – Rs 7.5 per liter more than needed under the IMF deal – to cut taxes on diesel.
The report released under the Extended Fund Facility (EFF) said risks to the outlook and program implementation remained high and on the downside given the highly complex domestic and external environment.
The spillover effects of the war in Ukraine via high food and fuel prices and tighter global financial conditions will continue to weigh on Pakistan’s economy, putting pressure on the exchange rate and external stability, the report said.
The report went on to say that the policy of granting subsidies remained a risk, compounded by weak capacity and powerful vested interests, with uncertain timing of elections given the complex political context.
Apart from the protest risk, socio-political pressures are expected to remain high and weigh on policies and reforms, especially given the fragile political coalition and their slim majority in parliament, according to the report.
The political situation in Pakistan has been fragile since mid-April, when former Prime Minister Imran Khan was ousted in a dramatic vote of no confidence and opposition leader Shehbaz Sharif was put in charge of a coalition government.
According to the report, political instability in the country could “affect policy decisions and undermine the program’s fiscal adjustment strategy, endangering macro-financial and external stability and debt sustainability”.
According to the lender, substantial risks stem from higher interest rates, a greater-than-expected slowdown in growth, exchange rate pressures, renewed policy reversals, weaker medium-term growth and contingent liabilities related to state-owned enterprises (SOEs).
“Further delays in structural reforms, in particular those related to the financial sector (resolution of undercapitalized banks and phasing out the involvement of SBPs in refinancing arrangements), could hamper the stability of the financial sector and reduce the effectiveness of monetary policy. Reduce.
Finally, risks from climate change are increasing, including a propensity for more frequent climate-related disasters,” it added.
The report also noted that the former Pakistani government granted Tehreek-e-Insaf a four-month “aid package” in late February that overturned commitments to fiscal discipline made earlier in the year.
The largely untargeted package lowered gasoline and diesel prices (through a generous subsidy and setting fuel taxes to zero); reduced electricity rates by Rs 5/kwh for almost all households and commercial consumers; and provided with tax exemptions and amnesty.
The report states that steadfast implementation of “corrective policies” and “reforms” remain essential to restore macroeconomic stability, address imbalances and lay the foundations for inclusive and sustainable growth.
“Efforts to reduce poverty and protect the most vulnerable by improving targeted transfers are important, especially in the current high inflation environment,” it said.
The IMF has forecast that Pakistan’s real GDP growth will slow to 3.5 percent in FY23, after two years of above-trend growth as the economy recovered from the COVID-19 pandemic with the support of expansionary policies.
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