In a significant economic development, Pakistan’s Consumer Price Index (CPI)-based inflation dropped to a 44-month low of 6.9% year-on-year in September 2024. This decrease, the lowest since January 2021, represents a sharp decline from the 9.6% inflation rate recorded in August, according to data released by the Pakistan Bureau of Statistics (PBS) on Tuesday. Analysts attribute this drop to the high base effect from the previous year, easing global commodity markets, and a stable exchange rate.
On a month-on-month basis, inflation fell by 0.5% in September, contrasting with a 0.4% increase in the previous month. This marks a significant shift in the inflation trend, which had seen high levels over the past few years. The drop in inflation has surpassed both market expectations and official forecasts, as the finance ministry’s recent economic outlook had projected a slower reduction to around 8-9% for September-October.
The decline in inflation has bolstered the case for further easing of monetary policy by the State Bank of Pakistan (SBP). The central bank recently cut its key policy rate by 200 basis points to 17.5% last month, marking the third consecutive reduction since June as the country seeks to stimulate economic growth amidst easing inflationary pressures.
“Due to aggressive monetary tightening, SBP has achieved bringing inflation below 7% one year ahead of target,” said Mohammad Sohail, chief executive officer at brokerage Topline Securities. Analysts suggest that as disinflation continues, driven primarily by the high base effect and decreasing global commodity prices, the SBP will have more leeway to continue reducing the policy rate.
Dr. Khaqan Hassan Najeeb, a former adviser to the Ministry of Finance, highlighted that Pakistan’s disinflationary trend was supported by several factors: a high base effect from last year’s inflation spike, declining global commodity and oil prices, and a stable exchange rate. “Tight monetary policy has curbed demand and also helped in curtailing inflation,” he noted. “The critical point is that the real interest rate is now near 11%, which gives room to ease monetary policy in the country.”
The inflation figures come at a crucial time for Pakistan, which recently secured a $7 billion loan program from the International Monetary Fund (IMF). The program includes stringent measures such as higher taxes on farm incomes and increased electricity prices, aimed at stabilizing the economy. While these measures have raised concerns among the poor and middle-class populations, the downward trend in inflation offers some relief.
The stabilization of economic indicators in Pakistan is a positive sign, especially considering the precarious situation the country faced last summer. At that time, Pakistan was on the brink of default before a last-minute bailout from the IMF helped avert a crisis. Since then, economic indicators have gradually improved, supported by tight monetary policy and fiscal measures aimed at curbing inflation and promoting stability.
As Pakistan navigates its economic challenges, the recent drop in inflation provides a hopeful outlook for the future. The continued easing of global commodity prices and a stable currency are expected to sustain the disinflationary trend, allowing the SBP to further reduce the policy rate and support economic growth. However, the government will need to balance these positive developments with the implementation of necessary but challenging reforms under the IMF program to ensure long-term economic stability and growth.
The decline in inflation not only reflects the effectiveness of current monetary policies but also underscores the importance of maintaining a stable macroeconomic environment. As the country continues to recover, the focus will likely remain on sustaining this positive momentum while addressing the structural issues that have historically hindered Pakistan’s economic progress.
