Inflation in Pakistan may average 33% till June — Moody's economist says IMF bailout insufficient

Pakistan government and the IMF could not sign a deal last week, but negotiations continue virtually. An agreement on the ninth review of the IMF programme would release over $1.1 billion of the total $2.5 billion pending as part of the current package agreed upon in 2019, which ends on June 30.

These funds are crucial for the Pakistan economy whose current foreign exchange reserves have dropped below $3 billion and could barely cover 18 days worth of imports. "Even though the economy is in a deep recession, inflation is incredibly high as (a result of) the latest bailout conditions," Ell said.

"So what we're expecting is that through the first half of this year, inflation is going to average about 33 percent and then might trend a little bit lower after that," Ell said. The consumer price index rose 27.5 percent year-on-year in January, its highest in nearly half a century.

Several Pakistanis could remain under extreme pressure as a result of high inflation even as prices of daily use items continues soar exponentially. "Food prices are high and they can't avoid paying for that, so we're going to see higher poverty rates, as well, feed through," the economist said.

Ell said the improvement in Pakistan's economy is "going to be very gradual. There's just no overnight fix". The weaker rupee, which is plumbing record lows, is adding to imported inflation while domestically high energy costs on the back of tariff increases and still elevated food prices is likely to keep inflation high.

"It is likely that we will see further monetary tightening in Pakistan to try and stabilise inflation and also with the weakness in the FX they might kind of intervene there to try and force in stability, but again it's not going to be a silver bullet," Ell added.

Last month, the central bank raised its key interest rate by 100 basis points (bps) to 17 percent in a bid to rein in persistent price pressures. It has raised the key rate by a total of 725 bps since January 2022.

"With significant recession-type conditions in Pakistan, skyrocketing borrowing costs could really exacerbate domestic demand struggles," she said. "You really need to see sustained sound macroeconomic management, and just injecting further funds in there without decent backing is not going to deliver the results that you're looking for."

The Pakistan government is set to present a tax amendment bill — the Finance (Supplementary) Bill 2023 — in both houses of Parliament on Wednesday as it rushes to fulfil the conditions of the IMF to revive a stalled loan programme that the country needs to stave off default, Dawn reported. Finance Minister Ishaq Dar will present the bill after 3:30 pm.

The government had agreed to a target of PKR 170 billion in new taxes with the IMF, which has been pushing for permanent revenue measures.

It aims to raise PKR 115 billion through federal excise duty on locally manufactured cigarettes and by increasinf general sales tax (GST) by one percent to 18 percent. The remaining amount of PKR 55 billion would be collected through an increase in excise duty on airline tickets, and sugary drinks and an increase in withholding tax rates after the Finance (Supplementary) Bill 2023 is approved by Parliament on Wednesday.