From Crisis to Control: Inflation Trends and the Evolving Role of Closed and Open Economy Dynamics in Pakistan

In recent years, Inflation has emerged as one of the most critical economic challenges in Pakistan, significantly battering the purchasing power of consumers. Demand for goods and services is influenced by two key factors: Individual’s willingness to pay and their ability to pay. As prices increase, a number of consumers are priced out of the market, leading to a decline in demand. Inflation’s most profound impact is seen in the cost of essential items that form a part of daily life. According to the Ministry of Finance, the Consumer Price Index (CPI) composition reflects that 34.6% of perishable and non-perishable food items, while Housing, water, electricity, Gas and other fuels represent the 23.6% share in the index. These two items account for 58.3% of the Consumer Price Index, which is logical given that the index emphasizes goods commonly used by the average person on a daily basis. In May 2023, the inflation rate stood at 38%, but it has steadily declined over time and in April 2024, it reached 17.3% and further decreased to just 0.3% in April 2025 on a year-over-year basis, reaching the lowest level in the past three decades.

The key question is what specific actions the government took to achieve this decline in inflation, like what strategies and measures were implemented. Typically, inflation stems from a demand-supply imbalance and is also caused by demand pull or cost push inflation. In 2023, when inflation exceeded 38%, the central bank responded with a huge interest rate of 22% to curb rising prices. However, several underlying issues contributed to the situation. The real sector, including the services and agriculture, underperformed partly due to the devastating floods. As a result, average inflation during Jul-May FY 2023 stood at 29.2%, driven mainly by rising food and energy prices, along with exchange rate depreciation.

High inflation had a significant impact on society. First, individuals with excess money benefited from higher returns on deposits, while borrowing declined due to the increased cost of credit, leading to reduced demand for money. Second, the government of Pakistan implemented a contractionary fiscal policy and maintained a stable exchange rate for over a year. This contributed to overall price stability, especially important given that Pakistan’s imports exceed its exports.

According to the State Bank of Pakistan, the government gradually reduced electricity tariffs, and food prices consistently declined, both of which contributed to easing inflation. As the economic outlook improved, the interest has been reduced from 22% to 11%, driven by positive developments in the economy. Additionally, the current account also contributed positively to the economy by easing external pressures. In March 2025, it recorded a $1.2 billion surplus, largely driven by strong remittance inflows. Meanwhile, the real sector has also shown steady improvement, with the cumulative surplus of $1.9 billion during July-March FY2025. In summary, the macroeconomic indicators are showing positive improvements. However, continued progress requires careful and rational policy decisions, as global uncertainty is there, particularly around tariff policies, which could still alter the current outlook.

Dr. Adnan Bashir

Visiting Faculty Member, National University of Sciences and Technology (NUST) Islamabad, Pakistan

Adnanbashir43@yahoo.com