Moaaz Manzoor

While ‘prudent’ monetary policy has temporarily eased inflation to a nine-year low, experts warned that structural vulnerabilities, government borrowing, and exchange rate pressures could trigger a future uptick, reports WealthPK.

Pakistan’s inflation rate fell to a nine-year low of 2.4% in January 2025 from 4.1% in December 2024. The drop, primarily attributed to a high base effect and lower food inflation, represents the lowest inflation reading in 111 months. Despite this, experts cautioned that inflationary pressures could return in the coming months, especially given the ongoing economic challenges and monetary adjustments.

Speaking with WealthPK, Syed Ali Ehsan, Deputy Executive Director at the Policy Research Institute of Market Economy (PRIME), attributed the current easing of inflation to declining domestic demand. "The slowdown in the economy directly contributes to the drop in inflation," he noted. With the State Bank of Pakistan reducing its key policy rate by 100 basis points to 12%, borrowing has become more affordable, which is expected to stimulate spending.

However, Ehsan warned against excessive government borrowing, stating that it "could hinder the growth of the private sector." He emphasised that the government should allow businesses to take the lead in capitalising on lower interest rates rather than enjoying these benefits itself. He also pointed out that while the immediate effects of monetary easing are evident, its long-term impact on economic stability hinges on a balanced fiscal strategy and stronger support for private sector development.

Dr Nasir Iqbal, Head of the Macro Policy Lab at the Pakistan Institute of Development Economics (PIDE), explained that inflation was currently stable at around 2-3%, but managing inflows and outflows remained challenging. "The central bank's strategy is to get dollars from the market just to build reserves and control currency fluctuation," he said. According to Iqbal, while the central bank has taken steps to limit private sector dollar holdings and stabilise exchange rates, inflation will likely pick up gradually.

"Inflation won't grow so fast, but the real issue arises when we need more imports, leading to a higher deficit and increased demand for dollars," he cautioned. “This, in turn, could trigger renewed price pressures in the economy.” Despite the current disinflationary trend, experts remain wary of future developments. While the monetary policy adjustments have contributed to easing inflation, structural vulnerabilities in the economy — such as reliance on external financing, fiscal imbalances, and currency volatility — pose risks.

Inflationary pressures may resurface if global commodity prices rise or the government turns to excessive deficit financing. The challenge for policymakers is to sustain economic stability while fostering growth, ensuring that inflation remains within manageable limits without stifling investment and consumer demand.

Credit: INP-WealthPk