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Pakistan Inflation Slows as Weak Demand Offsets Energy Cost

Traffic and pedestrians pass shops and market stalls illuminated by solar-powered bulbs in Jacobabad, Pakistan, on Thursday, May. 26, 2022. Climate change made the extreme temperatures that baked north-west India and Pakistan in April and May over 100 times more likely and also increased the chances that such heat waves will occur more frequently by the end of the century. (Asim Hafeez/Bloomberg)

(Bloomberg) -- Pakistan’s inflation pace slowed to the lowest in more than two and a half years in July as the impact of slowing consumer demand offset hikes in energy prices.

Consumer prices rose 11.09% in July from a year ago, according Pakistan Bureau of Statistics’ data released on Thursday. That compares with a median estimate for a 10.6% gain in a Bloomberg survey and a 12.57% increase in June. 

The latest reading signals that the State Bank of Pakistan needs to walk a fine balance between keeping consumer prices lower and jump-starting the economy. Inflation is well below the record 38% in May 2023, giving the central bank some room in slashing the policy rate for the first time in four years by a cumulative 250 basis points in June and July. 

Bringing down living costs is the biggest challenge for Prime Minister Shehbaz Sharif’s administration after it hiked taxes and raised energy prices from July to meet the International Monetary Fund’s conditions for a new loan. Sharif provided a subsidy of 50 billion rupees ($180 million) from its development budget to pause the increase in electricity prices for the smallest electricity users for three months until October. 

The latest inflation data released on Thursday showed housing and energy costs increased by 25.3% from a year ago. Food costs rose by 1.56% and transport prices climbed 12.8%.

The government faces growing public discontent and scattered protests though the possibility of social unrest remains limited with former premier and opposition leader Imran Khan behind bars while the next election due in early 2029. 

The government expects the IMF’s executive board to approve a $7 billion loan program this month after Pakistan secures funding assurances from China, Saudi Arabia and the United Arab Emirates. 

The financial aid is supposed to shore up the country’s foreign exchange reserves, which stands at $9 billion — equivalent to about two months of imports, and give policymakers space to revive the economy. However, volatile price gains will be a concern with the central bank this week estimating inflation to average 11.5% to 13.5% in the current fiscal year ending June 2025. 

--With assistance from Khalid Qayum.

(Updates with details in first and fifth paragraph)

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