Pakistan experienced highest inflation in the world in 2020 revealed SBP

Inflation was record high in January at 14.6%, fell in May

Pakistani people experienced record high inflation during the financial year of 2020. According to Inflation Monitor for April issued by the State Bank of Pakistan (SBP), people in Pakistan saw 2020 worst year as they witnessed highest inflation in the world. The record high inflation forced the SBP to increase the interest rates to highest level seen in recent period.

State Bank in its inflation Monitor for April revealed that “Pakistan witnessed highest inflation not only in comparison with the developed economies but also with emerging economies.” January witnessed 12 years high inflation at 14.6 per cent. In response to the rising prices, the SBP raised the interest rates to 13.25pc.

The SBP pushed up interest rates to cool down the inflationary pressure during the fiscal year but high rates proved counterproductive as they further increased inflation while the private sector stopped borrowing costly money hampering industrial growth and services.

But the State Bank reversed this trend of high interest with the emergence of coronavirus. The government was forced to impose restrictions and partial lockdown to contain the COVID-19 pandemic. The coronavirus crisis changed the whole scenario and SBP cut down interest rates to 5.25pc within just three months.

The inflation also started to fall and went down to 8.2% in May, much lower than the SBP projections for the month. The July-May inflation for the current fiscal year slipped below to the State Bank’s earlier projection of 11pc to 10.94pc. The number is expected to drop further in June.

Detailed graphs accompanying the SBP’s Inflation Monitor show Pakistan’s inflation, when compared to developing economies like China, Thailand, India, Bangladesh and Sri Lanka, has fallen since the pandemic.

The government has slashed petroleum prices thrice during the two months, which drastically reduced the cost of production, transportation and finally reduced inflation.

The industrialists and investors are demanding to the government to bring down the interest rate lower than 5.25pc to boost economic activities. Trade and industrial sectors, while demanding cuts to interest rate, also believe the economy needs additional injection of Rs3-4 trillion for full recovery.

However, with sharp economic slowdown, the revenue collection has also fallen short of target this year making further liquidity injection on such a large scale impossible for the government.

The SBP has provided relief amounting to hundreds of billions in the form of principal payments deferrals, debts rescheduling and lending on easier terms for industrial sector to avoid massive layoffs. The SBP announced to provide soft loans on low interest rates to industries and businesses to pay wages to their workers.

“The core objective of this facility is to incentivise businesses to not lay off their workers during COVID-19 pandemic,” the SBP said in a statement. “The scheme will be available to all businesses in Pakistan through banks and will cover all types of employees including permanent, contractual, daily wages as well as outsourced workers.”

The scheme would provide financing for wages and salaries expenses for three months from April to June 2020 for businesses which do not layoff their employees for the three months. The mark-up on the loans under the scheme would be up to five percent. Borrowers who are on the active taxpayers list would be able to get loans at a further reduced mark-up rate of four percent.

The SBP designed the scheme to give preference to smaller businesses. “Businesses with a 3 month wage and salary expense of up to Rs 200 million will be able to avail the full amount of their expense in financing while those with a 3 month wage and salary expense of greater than Rs500 million will be able to avail up to 50 percent of their expense,” it said. “Businesses in the middle category will be able to avail up to 75 percent of their 3 months’ salary and wage expense.”

Khalid Bhatti