Page 48 - CMA Journal (May-June 2025)

Focus Section

Inflation and Business Survival in Pakistan

What happens when rising costs consistently outpace a manufacturing
business’s ability to generate income? For companies in operations (NEPRA,
Pakistan, this is no longer a theoretical concern — it is a 2024). For energy-
daily struggle. Inflation is doing more than lifting price intensive sectors such
tags; it is quietly tightening profit margins, disrupting as cement, textiles,
financial planning, and forcing difficult operational and food processing,
decisions. this has been a game
changer — but not for
In this climate, business sustainability — the ability to
the better.
remain financially stable, competitive, and resilient over
time — is under mounting threat. As the cost of inputs At the same time, the
continues to rise and consumer spending declines, cost of imported raw
businesses across nearly every sector are finding it harder materials - everything Muhammad Umair, ACMA
to stay profitable. This article reflects how inflation is from chemicals to Co-Founder and Partner at
changing the economic landscape in Pakistan, steadily machinery - has soared FAUD (Faizan Umair
draining profitability and challenging the lasting due to the rupee’s Danial & Co)
sustainability of enterprises. steep depreciation. A
textile manufacturer importing cotton or dye, or a
Inflation, Costs, and Squeezed Margins pharma- ceutical company relying on imported

When inflation rises faster than business revenues, the ingredients, now pays twice as much in rupee terms as two
outcome is predictable yet painful: squeezed profit years ago. Even local inputs have not been unaffected.
margins, growing uncertainty, and increasingly Wage costs have risen significantly, as the federal
survival-driven decisions. In Pakistan, this is not a minimum wage increased by 35% between 2022 and
temporary event — it has turned into a structural 2024, primarily to shield workers from inflation (SBP, 2024).
challenge. Inflation rose to 38% in May 2023, the highest While necessary for social stability, this puts a heavy
rate in the region at the time (PBS, 2024). Although it burden on already cash-strapped businesses.
decreased to 24.5% by early 2024, the economic damage What does this mean for profit margins?
had already taken root in the form of higher operating
costs and weakened consumer demand (SBP, 2024). By Most firms, especially small and medium-sized
April 2025, inflation had decreased significantly to just enterprises (SMEs), have found it impossible to pass the
0.3% before rebounding modestly to 3.5% in May 2025, full increase in costs on to consumers. Double-digit
reflecting a shift from crisis inflation to disinflation and inflation has diminished the purchasing power of the
early signs of stabilization (PBS, 2025). However, the average household for over two years. Consumers buy
effects of past inflation still persist. Businesses — mainly less, trade down to lower-quality alternatives, or delay
SMEs — continue to struggle with pressures that threaten purchases altogether. This price sensitivity limits revenue
their long-term sustainability, including rising costs, growth, even as operating expenses keep climbing.
squeezed margins, and cautious consumer spending.
Meanwhile, the net profit margins across multiple sectors
The causes of this inflation are diverse: fuel prices have declined dramatically. According to annual reports
increased significantly following cuts to government from KSE-100 listed companies, average net profit
subsidies; global commodity prices have risen sharply; margins decreased from 9.8% in 2021 to 6.1% in 2023,
the PKR has depreciated by more than 50% over the past with some sectors like textiles and automotive dipping
two years; and supply chain disruptions remain below 5% (PSE, 2024). For SMEs, the situation is worse.
unresolved. All of these factors have directly resulted in According to a Pakistan Business Council survey from late
higher input costs for businesses across various sectors. 2023, over 62% of SMEs were either achieving break-even
For instance, electricity tariffs for industrial users or operating at a loss, citing inflation as the most
increased from around PKR 16/kWh in 2021 to PKR significant operational threat (PBC, 2023).
35/kWh in 2024, doubling the energy burden on

46 ICMA’s Chartered Management Accountant, May-June 2025