It has been a long time since Akram Khan, a father of seven in his mid-40s, has been able to serve his family meat. “A year ago, I used to bring a full basket every morning,” said the fruit seller, pointing to his half-empty cart of guavas, bananas and a few apples in a busy Islamabad market. “Growing prices of every food has made it difficult . . . Now, people just can’t buy as much as before.”
Pakistan’s more than 220m people were spared the worst of the coronavirus pandemic’s initial economic shock, thanks in part to the government’s policy of shorter, looser lockdowns.
But they are now facing a new crisis: inflation has surged to the worst level in years, with an index tracking everyday essentials such as fuel, food and soap last week rising above 18 per cent year on year.
The rupee has also tumbled to all-time lows, losing 15 per cent of its value against the dollar in six months. Officials fear that a surging import bill will deplete foreign currency reserves and further destabilise the economy.
This poses a growing challenge to Prime Minister Imran Khan. His Pakistan Tehreek-e-Insaf party won power in 2018 on a vow to end the country’s cycles of economic instability, where high debt and low foreign currency reserves forced repeated bailouts from institutions such as the IMF.
But Khan has found himself trapped in this same vicious rhythm, and rival parties have sought to take advantage of the recent price surge to weaken or oust him before he serves the remaining two years of his term.
“The political implication of [inflation] is immense. For the PTI government since the start, the economy has been their weakest link,” said Bilal Gilani, executive director of Gallup Pakistan. “There has been instability in the past three years, but the past three months have been really challenging.”
Authorities said they were taking steps to manage the situation. The IMF and Pakistan last week agreed to resume the next $1bn tranche of a suspended $6bn financial package signed in 2019, pending final approval from the fund’s executive board.
The State Bank of Pakistan last month also raised its benchmark interest rate 150 basis points to 8.75 per cent in an effort to quell inflation. The central bank said it has taken other steps such as liberalising the exchange rate, which it believes will help in the long term.
Some analysts, such as Gilani, however, believe the central bank has continued to intervene in the currency market.
Reza Baqir, governor of the central bank and a former IMF official, told the Financial Times that Pakistan was working to end the “boom and bust cycles” that have plagued its economy. “We cannot let our history rob us of our future,” he said in an interview last month. “What we’re trying to do now is to demonstrate a break from the past.”
Authorities have blamed rising prices on the global uptick in inflation. But critics said Pakistan’s predicament was a product of the same domestic mismanagement that forced Khan — who once said he would rather die than take “a begging bowl” to foreign powers — to agree to Pakistan’s 12th IMF bailout since the 1980s.
“Structural issues haven’t been addressed,” said Asad Sayeed at the Collective for Social Science Research, a Karachi-based think-tank.
The PTI “rode on the back of all economic problems being linked to corruption”, Sayeed added, saying the party argued that: “‘Once we come into power and corruption is contained, then the proverbial rivers of milk and honey will flow.’ None of that has happened.”
Pakistan expects growth of more than 4 per cent this year, according to Fitch, the rating agency, but a hotter economy is also fuelling increasing imports for goods such as fuel and new cars.
With Pakistan’s chronically weak export sector unable to counter the surge, the current account deficit in the quarter ended in September widened to $3.4bn, compared with $1.9bn in the previous financial year ending in July.
The rupee has dropped to record lows of more than Rs170 to the dollar as the stalled IMF programme unnerved investors. But in order for the fund to resume financial assistance, Khan has had to agree to painful measures such as hiking petrol and electricity prices.
Analysts have warned that such unpopular steps risked deepening the political backlash by further squeezing low-income Pakistanis and small businesses. “Even motorcyclists are complaining [about] fuel price increases,” said Ayaz Amir, a former member of parliament with the opposition PML-N party. “The government is looking vulnerable.”
To ease the pinch, Khan launched a $700m scheme last month to provide subsidised staples such as flour and pulses to millions of eligible households. The prime minister hailed the effort, which he said was the country’s largest ever and would provide much-needed relief, as embodying his government’s goal to create an Islamic welfare state.
“All of this is so Pakistan can be made into the state it was meant to be . . . a state that takes responsibility for the ones left behind,” Khan said in a speech last month.
But critics questioned whether the government’s steps could be effective at alleviating the short-term economic struggles as well as addressing deeper challenges.
Azeema Cheema, a director at Verso Consulting in Islamabad, argued that Khan’s government was doing more to “control public perception around inflation, but not actually [to] address inflation. This is going to be a very difficult winter.”