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Pakistan witnesses highest inflation in the world during fiscal year 2020

The State Bank of Pakistan was forced to push up interest rates to calm the inflationary pressure during the fiscal year.

Jun 8, 2020 12:00 IST
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Pakistan witnessed the highest inflation in the world during the fiscal year 2020, as per a statement by State Bank of Pakistan (SBP) on June 7, 2020. The bank reported that due to the high inflation rate, policymakers have been forced to increase the interest rate.

According to the Inflation Monitor issued by the SBP for April 2020, Pakistan witnessed the highest inflation in the world in comparison to both developed and emerging economies. The State Bank of Pakistan was forced to push up interest rates to calm the inflationary pressure during the fiscal year.

However, higher interest rates had an adverse impact as they pushed the inflation further up. The private sector also stopped borrowing money, impacting industrial growth and services.

Key Highlights 

•  Pakistan witnessed 12-year high inflation at 14.6 percent in January 2020. The SBP increased the interest rates to 13.25 percent in response to the rising prices. 
 
•  The State Bank of Pakistan, however, was forced to cut down the interest rates to 5.25 percent in just three months after the economic crisis brought on by COVID-19 pandemic reduced demand, thus, lowering inflation. 

•  The interest rate cut came as inflation slowed down to 8.2 percent in May, which is much lower than the SBP projections for the month.

•  Pakistan's inflation has come down since the pandemic in comparison to other developing countries including China, India, Bangladesh, Sri Lanka and Thailand. This was revealed by detailed graphs along with SBP’s inflation monitor.

Pakistan’s inflation in May slips below projection

After recording the highest inflation in the world, Pakistan’s inflation in May has slipped below the State Bank’s earlier projection of 11 percent to 10.94 percent. The inflation rate is expected to fall even further in June. 

How did Pakistan reduce the inflation rate?

The Pakistani government reduced petroleum prices thrice during the two months, which drastically reduced the cost of production, transportation. This helped bring down inflation.

What are the core issues?

The trade and industrial sectors in Pakistan have been demanding a reduction in interest rates and additional liquidity injection of Rs 3-4 trillion for full economic recovery.

However, with a sharp fall in the economy, the revenue collection has also fallen short of target in 2020, making further liquidity injection on such a large scale impossible for the Pakistani government.

The State Bank of Pakistan has introduced relief measures in form of deferral of principal payments, rescheduling of debts and lending on easier terms to the industrial sector to avoid massive layoffs.