Inflation Outlook in 2024 and the Role of Central Bank

Pakistan's economy has been enduring a prolonged period of inflation, greatly impacting the medium and lower-income segments of society. Over the years spanning from 2013 to 2024, significant shifts have occurred within the economic landscape, leading to a substantial increase in the overall price level. Price indices indicate a greater increment when we incorporate food items in the consumption basket. This has placed considerable financial strain on households across the country.

For example in 2018, the price of a 20kg bag of wheat flour surged by an alarming 307%, accompanied by a 199% increase in the price of paddy rice per kilo. Even homemade bread, typically seen as a cost-saving measure, experienced a sharp 171% price hike over the span of six years. Despite a slight decrease in year-over-year inflation recorded in March 2024, the burden on consumers remains significant, particularly for staple items like wheat flour, basmati rice, bread, chicken, eggs, and cooking oil.
The data paints a stark picture of the ongoing struggles faced by Pakistani families in meeting their basic needs. Over the period from June 2018 to March 2024, Price of consumer basket has increased from 13693 PKR to 47,237 PKR, reflecting a 245 percent increase. On the other hand the minimum wage increases by 98 percent from 16,200 PKR in 2018 to 32,000 PKR in 2024, it remains insufficient to maintain the same standard of living as in 2018. To sustain a comparable quality of life, a minimum wage of 55,200 PKR is estimated for 2024, reflecting a considerable decline in real income by 42 percent.

Overall, the inflation rate remained volatile in the recent years, reaching its highest point at 29.18% in 2023 and eventually falling to 23.55% in 2024. The inflation rate of Pakistan in 2023 is higher than the global average inflation rate of 5.8 per cent, making the affordability problem even worse for its people.

The objectives of the Central Bank (CB) traditionally encompass maintaining price stability, fostering economic growth, and promoting employment. However, with the amendment to the State Bank of Pakistan (SBP) Act in 2021, there has been a notable shift in priorities. Under the amended act, price stability has been designated as the primary objective of the SBP, followed by the stability of the financial system. Conversely, economic growth and employment have been relegated to the least important considerations for the SBP.

This amendment underscores a significant policy change, signaling a heightened emphasis on controlling inflation and ensuring the stability of the financial sector. While economic growth and employment remain important factors in the context of Sustainable Development Goals (SDGs), the SBP's mandate now places greater emphasis on price stability and financial system stability.

Committing to price stability as the primary objective of the Central Bank may indeed require compromises on employment and economic growth. When the Central Bank prioritizes controlling inflation, it may implement policies such as raising interest rates or reducing the money supply, which can dampen economic activity and potentially lead to higher unemployment. The impact of unemployment is disproportionately felt by the poorest segments of society. For example, if there is a 1% rise in unemployment, the consequences are far more severe for the bottom 10% of income earners. In practical terms, this means that a relatively small increase in the unemployment rate can result in a significant number of the poorest individuals losing their jobs, exacerbating income inequality and widening socioeconomic disparities.

When the State Bank of Pakistan (SBP) insists on maintaining higher interest rates to combat inflation, it can lead to several adverse consequences. One significant outcome is the escalation of domestic debt. For instance, between April 2022 and April 2023, domestic debt increased by 26 percent. Additionally, the markup payment on this debt rose by a staggering 87 percent during the same period.

In June 2023, the budget allocation revealed a stark reality: 51% of the budget was allocated for markup payments (7.3 trillion), and 7.1 trillion for all other expenses combined. Further, IMF directives prompted a reduction in development and non-markup expenditures, further squeezing the budget to 6.9 trillion. Despite efforts to contain expenses, the State Bank of Pakistan's (SBP) decision to raise the policy rate led to an unexpected surge in markup expenditures.
As a result, the Ministry of Finance (MoF) estimated markup payments to reach 8.5 trillion, reflecting an alarming trend. Projections indicate that this figure could escalate to 9.2 trillion, effectively consuming two-thirds of the 2024’s budget. This staggering allocation underscores the overwhelming burden of debt servicing, crowding out resources for critical developmental initiatives and other essential expenditures.

This surge in domestic debt and markup payments reflects the broader economic challenges arising from high interest rates. Elevated borrowing costs not only strain government finances but also crowd out private investment. With a significant portion of the budget allocated to debt servicing, resources for critical developmental initiatives become limited, exacerbating the country's economic woes.

This scenario illustrates how the current monetary system has prioritize price stability at the expense of broader national interests, including economic development and job creation. By maintaining high policy rates to combat inflation, the SBP may inadvertently hinder growth and perpetuate unemployment, ultimately undermining the country's long-term economic prosperity. Balancing the objectives of price stability with those of economic growth and employment is crucial for fostering a sustainable and inclusive economy that benefits all segments of society.

To tackle these urgent concerns, several recommendations are put forward:
• Advocate for evidence-based monetary policy from the State Bank of Pakistan (SBP) to demonstrate the effectiveness of its actions in addressing economic challenges.
• Consider reducing the policy rate to levels comparable to peer economies like India and Bangladesh to stimulate economic activity, encourage investment, and enhance competitiveness. It can save over 6000 billion PKR to be used for other purposes. And lowering policy rate can enhance business by higher level of investment. Higher investment in private sector can further improve the balance of payment.
• Implement prudential regulations to control overspending and ensure fiscal discipline, thereby mitigating the burden of debt servicing and creating fiscal space for developmental initiatives.
It is now imperative to incorporate the above mentioned to manage the impact of inflation and regain economic stability so that the people of Pakistan can have a positive outlook of the future. 


The Centre for Economic Planning and Development (CEPD) is established to improve economic decision-making by identifying policy challenges and designing and advising on high-impact policy reforms based on empirical evidence.  Read More

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