Pakistan’s economy has weathered one of the most turbulent inflationary periods in its recent history, as a convergence of global disruptions, domestic vulnerabilities, and climate disasters drove consumer prices to record highs between 2021 and 2025. The episode, marked by soaring food and fuel costs, sharp currency depreciation, and historic floods, left deep scars on households, industries, and the national economy.
Economists describe the period as “the most severe inflation shock in decades,” with the Consumer Price Index (CPI) peaking at 38% in May 2023, the highest in South Asia at the time. Although inflation has since fallen sharply, analysts warn that the social and economic fallout will continue to shape Pakistan’s trajectory for years.
Global Pressures and Domestic Fragilities Ignite the Surge:
Pakistan entered 2021 with inflation already climbing. The fiscal year closed with CPI at 8.9%, driven largely by food and energy supply disruptions. The State Bank of Pakistan (SBP) kept interest rates low to support recovery from COVID-19, but by late 2021 inflation surged into double digits, prompting an aggressive tightening cycle.
The situation deteriorated further in 2022 after Russia’s invasion of Ukraine sent global commodity markets into turmoil. Oil, wheat, edible oil, and fertilizer prices soared internationally. Pakistan, heavily reliant on imports, absorbed the full impact as the rupee depreciated by 28% in 2022, touching 239.93 against the US dollar by September.
By mid-2022, headline inflation exceeded 21%, with food inflation approaching 27% across rural areas.
➡️Historic 2022 Floods Push Inflation to New Heights:
The inflation crisis turned catastrophic when unprecedented floods struck Pakistan between July and September 2022. A third of the country was submerged, 33 million people were affected, and agriculture, the backbone of rural Pakistan was devastated.
Losses exceeded USD 30 billion, with millions of acres of crops destroyed.
Shortages sent food prices soaring:
• Wheat flour up 54%
• Rice up 48%
• Sugar up 18%
• Chicken up 40%
By October 2022, inflation reached 26.6%, with rural food inflation exploding past 31%.
2023: Inflation Peaks as Currency Slides and IMF Conditions Tighten
The crisis deepened in early 2023 as delays in IMF funding, dwindling foreign reserves, and market uncertainty drove further rupee depreciation, nearly 20% in the first quarter alone.
In March 2023, CPI hit 35.4%, while food inflation breached 50% in some regions. Wholesale prices also surged, raising production costs across industries.
May 2023 marked the peak:
Headline inflation: 38%
Food inflation: 48%
The cost-of-living crisis grew dire. Households spent over a third of their income on food. Real wages fell nearly 9%. Poverty surged to 27.4%, pushing millions below the poverty line.
➡️Industries Contract as Energy and Input Costs Escalate:
Large-scale manufacturing shrank by 25% in March 2023, while the textile sector—Pakistan’s largest exporter—reported a double-digit decline in shipments. High energy prices, a rising petroleum levy, and repeated fuel hikes hit transport and production sectors hard.
Public anger spilled onto the streets. Traders, mill owners, transporters, and the public staged widespread protests against higher taxes, inflated utility bills, and persistent price hikes.
➡️Government Response: Tight Budgets, Targeted Relief:
With IMF conditions limiting broad subsidies, the government relied on targeted support. Cash transfers under the Benazir Income Support Programme (BISP) were increased by 25%, with allocations raised to PKR 400 billion. Relief packages for flood hit regions, subsidized items at Utility Stores, and limited energy subsidies helped cushion the poorest groups.
Fiscal consolidation became central from FY24 onward. Tax targets were raised, spending was cut, and the Public Sector Development Programme was expanded to stimulate long-term growth.
➡️Disinflation Takes Hold in 2024-2025:
A combination of strict monetary policy, improved food supplies, a stabilizing rupee, and lower global fuel prices brought inflation down dramatically in 2024.
From a peak of 38%, inflation fell below the SBP’s target range, settling at 2.4% by January 2025, its lowest in six years. The policy rate, held at 22% through most of 2023, was gradually cut to 13% by February 2025.
The external sector improved sharply:
• Foreign reserves rose to USD 15.6 billion
• The current account posted a surplus
• Remittances held above USD 3 billion per month
• The rupee strengthened to the 280 to 283 range per dollar
Despite progress, Pakistan faced renewed challenges in 2025 when monsoon floods again disrupted crops in Punjab and KP. Wheat prices surged by 63% in some markets. The SBP responded cautiously, holding the policy rate at 11% amid concerns of inflationary resurgence.
➡️Human Cost: Rising Poverty, Inequality, and Social Strain:
The inflation shock had severe social consequences. Poverty rose from 21.9% in 2019 to 25.3% in 2024. Lower-income households, who spend disproportionately on food, endured the most of rising prices.
Inequality also widened:
• Gini coefficient: 29.6
• Income gap between richest and poorest: 16:1
For many families, electricity bills consumed up to 70% of household income at the peak of the crisis.
➡️A Wake Up Call for Pakistan’s Economic Future:
Economists argue that the 2021-2025 inflation crisis highlights Pakistan’s deep structural vulnerabilities: heavy import dependence, limited fiscal buffers, exposure to global shocks, and extreme climate risk.
Experts stress urgent priorities:
• Strengthening food security
• Expanding social safety nets
• Building climate-resilient infrastructure
• Reforming energy and tax systems
• Stabilizing long-term fiscal policy
The painful lesson, analysts say, is clear: without systemic reforms and climate preparedness, Pakistan stays vulnerable to future shocks.
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