Money Market Monday September 09, 2017 at 14h51 GMT

Money Market Monday 09th September, 2017 at 14h51 GMT

Inflation Climbs to 8-Year High, Putting Additional Pressure on Pakis­tan Economy

Data out today show that Pakistan’s inflation accelerated to 8% in the month of August. Growth was driven by rising petrol and food prices; these were up by 7.6% and 5.7% respectively. The government had claimed that fuel prices had been raised for the benefit of the people, but the data suggest otherwise.

The continued rise in inflation adds to the pressure on Pakistan’s fragile economy. The ongoing recovery will prove challenging, as the real, inflation-adjusted pace of GDP growth is already in negative territory.

The real growth data, which strips out inflation-adjusted spikes, came in at 2.7% in the year to March 2017. The International Monetary Fund estimates that Pakistan’s long-term GDP growth is likely to hover around 4.5%, driven by the highly indebted energy and infrastructure sectors.

If Pakistan’s macroeconomic indicators continue to deteriorate, the IMF will likely turn more cautious in its view of Pakistan’s growth prospects, which are already below its forecasts.

Pakistan’s inflation trajectory does look particularly worrisome. Between 2014 and 2017, Pakistan has witnessed four consecutive years of inflation averaging above 8%. A shift in the traditional growth paths that Pakistan previously benefited from may make the current situation worse, as improvements in the energy sector and infrastructure have helped fuel several years of strong growth.

One positive is that the Pakistan rupee has stabilized against the dollar this year, which should help ease pressures on the country’s balance of payments. However, if the country’s balance of payments deteriorates further, it will be more difficult for the government to prop up the rupee.

We continue to expect Pakistan’s annual inflation to average 7.5% this year, and to stay above 8% in 2018.

Finance Minister Asad Umar has recently announced that a new Debt Management Unit would be set up to help manage Pakistan’s external debt. This is a welcome step, and we expect Pakistan to pursue more and more restructuring of its foreign debt as it has the ability to do so.

Failing to do so could potentially have far-reaching implications for Pakistan’s fiscal deficit and external debt dynamics.

Developing Countries in the region have seen borrowing costs soar this year as economic growth slows, and investors worry about the impact of rising global interest rates.

Where would you rather park your money? That’s the question that a new survey on the effects of an uncertain economic outlook on investment levels by the Institute of International Finance seeks to answer.

Source: ieisglobal/Institute of International Finance

Data sources: Office of National Statistics of Pakistan, and Pakistan Bureau of Statistics.

About IMF’s debt strategies

Ongoing fiscal consolidation will continue to put downward pressure on Pakistan’s debt servicing costs. The authorities need to make the best use of the country’s free reserves, so they will continue to de-leverage debt rather than re-borrow. Pakistani policymakers have stepped up debt management, and taken some important policy actions, including on interest rates and oil prices. To stay on the right path, they will need to continue to pursue policies to diversify the economy, build up fiscal buffers, and work on more balanced investments. We will be monitoring the situation and prepared to provide information in the case of a deteriorating economic situation.

The global economic outlook remains fragile and mixed. Most industrialized countries, except for Japan, have posted moderate, if slightly weak, recovery in growth in recent quarters, with countries including the United States and the United Kingdom in expansion. However, fiscal policies remain tightening for most countries, and the global financial system continues to be susceptible to shocks. Financial vulnerabilities and concern over credit risks as a result of rising interest rates are particularly acute in the oil-importing economies.

Policy adjustment will be necessary in the coming year to adjust to the rise in interest rates and to boost long-term growth. Given the uncertainties ahead, macroeconomic policy should continue to focus on strengthening the transmission of monetary policy to the real economy, achieving good public finance, and diversifying the private sector, especially in non-agricultural sectors.

© International Monetary Fund, 2017

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