Pakistan’s inflation rate climbed significantly to 11.7% in May, intensifying pressure on an already fragile economy. This rise surpasses the State Bank of Pakistan’s target range of 5% to 7%, signaling growing financial difficulties as consumers face soaring prices for essentials like transport and perishable food items.
Experts link this inflation upswing to a combination of supply-side shocks, including sharply higher transport costs and a steep increase in the oil import bill due to geopolitical tensions, particularly the ongoing US-Iran conflict. These factors have undermined purchasing power and strained the country’s balance of payments, given Pakistan’s heavy reliance on imported energy.
The central bank responded by raising its policy interest rate by a full percentage point, aiming to curb inflation. However, economists warn this monetary tightening may prove counterproductive. Since Pakistan’s inflation largely stems from supply disruptions rather than excessive demand, higher interest rates risk dampening investment and could push the economy toward stagflation, characterized by stagnant growth alongside rising prices.
On the financial front, uncertainty has caused commercial banks to favor government securities over lending to the private sector, restricting business credit and further hindering economic expansion. This trend reflects low confidence in market conditions and limited appetite for risk, complicating the country’s prospects for recovery.
Prime Minister Shehbaz Sharif highlighted the severity of the oil import cost surge, which escalated from $300 million to $800 million amid regional conflicts, effectively wiping out economic gains made over recent years. This setback underscores Pakistan’s vulnerability to external shocks and the difficulty in stabilizing inflation without addressing structural supply constraints.