Prosperity index drops as inflation continues to climb

• Pakistan Prosperity Index (PPI) fell 1.7 points in November 2021, states the research report by PRIME.
• Currency depreciation and rising international commodity and petroleum prices will contribute to inflation, says report.
  
• Pakistan urgently requires a conducive business environment, says report.
  

ISLAMABAD: Pakistan Prosperity Index (PPI) fell 1.7 points in November 2021, owing primarily to rising inflation, currency depreciation, and diminishing foreign investment, according to Policy Research Institute of Market Economy (PRIME) research released on Thursday, The News reported. 

“In contrast, the overall decline in prosperity was moderated by an increase in private sector borrowing, trade volume, and output of the manufacturing sector,” said the report.

The report stated that inflation remains a critical challenge that has a significant influence on the country's economic activity and poses a serious threat to economic development.

According to the study, currency depreciation and rising international commodity and petroleum prices will contribute to inflation and a slowdown in the economy; however, addressing supply-side bottlenecks such as lower productivity, lack of innovation, and research will help alleviate challenges at home.

Furthermore, it stated that the country urgently required a conducive business environment, which necessitated greater ease of doing business.

After a brief stabilisation in September and October 2021, the Pakistan Prosperity Index fell 1.7 points to 136th place in November 2021.

The report further stated that this statistic indicates a fall in economic prosperity in November 2021, as a result of a persistent decline in purchasing power, a decline in the currency rate, and a large drop in foreign direct investment in the country.

The year-on-year inflation clocked at 11.5% in November 2021 while month-on-month inflation stood at 3%, representing a significant increase in prices and purchasing power fell to the lowest in the period.

The purchasing power index continued to deteriorate, falling 9.6 points from 86.2 to 76.6 throughout the period. The large supply-demand gap, as well as rising worldwide petroleum and commodity prices, are causing inflationary pressures.

In November 2021, the production of large-scale manufacturing (LSM) grew 1.9% month-on-month and 0.3% year-on-year.

In the last year, the LSM has dropped 16 points. It increased on a monthly basis due to a 1% increase in the car, iron and steel, and mineral products industries, while seven other industries experienced negative growth.

From Rs1.51 trillion in October 2021 to Rs1.86 trillion in November 2021, trade volume surged by 23% month-on-month, bringing the TOI (Trade Openness Index) to an all-time high of 199 points. In comparison to October 2021, exports climbed by Rs.79 billion, while imports increased by Rs.273 billion.

Despite a 150 basis point hike in the policy rate to 8.75% in November 2021, private sector borrowing from banks continued to rise.

“The overall economic performance, as measured by PPI, is not encouraging due to mounting challenges as the widening current account deficit because of a significant increase in the international commodity and energy prices and the resultant hike in the policy rate will contribute to slow down in the economic activities in the country,” the PRIME study said.

It goes on to say that inflation is still a major issue, but that it may be mitigated by tackling supply-side obstacles including decreased productivity and energy supply disruptions.

In November 2021, the long-term finance facility reached an all-time high of Rs493 billion, up from Rs4701 billion in October 2021.

“The domestic currency has remained volatile with frequent fluctuations thereby decreasing the soundness of money,” it said, adding, that the average monthly exchange rate stood at Rs173 against the dollar in November 2021 compared to Rs.171.7 in October 2021 and Rs160 in December 2020.

However, FDI (foreign direct investment) inflows into the country continued to decline in November 2021, falling to $220 million from $300 million in October 2021, according to the report.

“Pandemic enforced disruptions and global rising energy and commodity prices remained the cause for growing uncertainty and a subsequent fall in investment,” the report concluded.