Inflation continues to bedevil the Pakistani residents three years into the tenure of the Khan administration in spite of repeated public acknowledgements by the Prime Minister and his cabinet members that inflation is a source of concern. In spite of best efforts by the government, reflected by the country’s Prime Minister reportedly raising the issue at every meeting, the inflation genie remains outside the bottle wreaking havoc amongst the lower to middle income earners.
The inflation genie was let loose in 2019 subsequent to the staff-level agreement reached between the then newly appointed economic team led by Dr Hafeez Sheikh as the de facto finance minister and the International Monetary Fund (IMF) with the governor of the Central Bank as one of the signatories from the Pakistan side.
And the outcome of the agreed extremely tight monetary and fiscal conditions led the Fund to project inflation at 13 percent. By April 2020, the onslaught of the pandemic led to a further productivity decline but with a commensurate decline in demand, prices rose by 9 percent – 3 percent less than the year before. The post-pandemic easing of the monetary and fiscal policies together with the amnesty for the construction sector fuelled output growth, though it was largely confined to the rise in suppressed demand for cars and housing, that fuelled growth to 3.94 percent against the projected 2 percent.
Prime Minister Imran Khan and his team have so far dealt with inflation through blaming previous administrations, a charge that has some merit as the contracts signed with the Independent Power Producers (IPPs) envisaging payment indexed to the dollar and capacity payments has rendered the power sector unable to check the flow of the burgeoning circular debt.
Given that the 2016 IPPs have refused to renegotiate the terms and conditions with the eroding rupee further adding to the tariff, the government needs to turn its attention to check the pace of the rupee erosion as the only means available to check the rise in electricity rates, a major input for most manufacturing output.
Additionally, the rupee erosion – from 152 rupees to the dollar in May 2021, the basis for the budget projections, is more than 172 rupees to the dollar today – is impacting on fuel and cooking oil prices (accounting for around a quarter of our annual imports) in the domestic market.
Food prices are rising, and while as Shaukat Tarin correctly stated, the aarthis with their generational links to poor farmers bear responsibility for procuring farm products cheaply and selling them dearly in the market, a nexus he intends to break through providing credit to the poor farmers, yet the cost of farm to market transport has risen significantly due to the rise in the international price of oil, which is compounded by the massive rupee erosion in recent months. Tarin has also stated that administrative measures are required to contain inflation, which again have not proved too successful.
Economic theory dictates that the appropriate monetary and fiscal policies to check inflation include: (i) a budget deficit that is sustainable.
For the past three years the deficit has been unsustainable at over 7 percent and while the current year’s budget envisages a deficit of 6.3 percent of GDP it needs to be highlighted that the budget was prepared at a rupee-dollar parity of 152 and each subsequent rupee loss vis a vis the dollar adds 100 billion rupees to debt servicing and with 20 rupee loss since May 2021 the actual increase in expenditure is over 2 trillion rupees; (ii) total outlay was budgeted at 8.4 trillion rupees for the current year while tax revenue is budgeted at 5.8 trillion rupees which implies reliance to the tune of over 2 trillion rupees on domestic and external borrowing – a reliance which is compromising the country’s balance of payment position; (iii) the government’s emphasis on subsidies and cash disbursements (comprising of 3 percent of the total budgeted outlay) are not enough to meet the needs of 40 percent of the population living below the poverty line today.
It must be brought home to the government that even the rich countries do not have sufficient resources to extend subsidies to meet the needs of their poor.
Therefore, the solution lies in checking the free fall of the rupee as well as in massive containment of government expenditure as the contribution of these two factors to inflation is being ignored with disastrous consequences.
