Islamabad has taken credit for the drop in inflation from 28.8 percent to just 7.2 percent during the first half of fiscal year (FY) 2024-25. The government asserts that falling inflation rates can be attributed to the crusade against smuggling, hoarding and illegal foreign exchange operations.

 

According to the announcement made by the Finance Ministry, the slowdown in inflation was made possible by the federal government's responsible fiscal policies. Furthermore, the stabilisation of the exchange rate, coupled with improved procurement for essential commodities, helped control rising prices.

 

The announcement further revealed that Islamabad’s crackdown on illegal foreign exchange companies was able to instill confidence in the market, allowing for the supply of goods to stabilise.

 

Data from the finance ministry show that the long-term inflation rate will sit close to approximately seven percent in the upcoming half of the fiscal year. This is likely to create an environment that will assist business growth.

 

The reasoning behind this is that high inflation rates erode customer purchasing power, leaving consumers to allocate their funds to more essential goods and services.

 

Furthermore, as inflation peaked at approximately 29 percent in 2023, businesses had to make the tough decision of either raising prices to maintain profit margins or to keep prices unchanged while absorbing the difference. The latter practice, while helpful in retaining customers, results in smaller profit margins.

 

However, experts predict that low inflation rates, coupled with declining policy rates, can bolster economic growth. Businesses and consumers will increase their expenditures, resulting in a rise in aggregate demand.

 

Falling inflation rates outline the federal government’s achievements, as this outcome could not have been achieved without fiscal consolidation. The State Bank of Pakistan (SBP) should also be credited for controlling the rate of inflation as well.

 

This is because the SBP raised the interest rate to about 22 percent, easing the inflationary pressures in the economy. Funds previously used for consumption purposes were diverted to savings accounts in an attempt to capitalise from the high interest rates in the economy.

 

This allowed the inflation rate to decline to a more manageable 7.2 percent in the first half of FY 2024-25. Rising interest rates also brought vast amounts of foreign currency into Pakistan, as foreign investors purchased local treasury bills to benefit from their high profit rates. This helped stabilise the exchange rate as well.

 

However, the SBP has slashed interest rates over the past six and a half months to boost investment levels once again. Reports have revealed, however, that even falling interest rates have not derailed the downward trajectory of inflation rates.