Prices, no doubt, have increased recently, but the blame does not solely lie on the PTI government as the opposition says. There are many factors involved in the situation over which the government has no control.
Prices all over the world have gone up in recent months. The prime reason is that a sudden spurt in industrial production in major economies has pushed up the demand for energy and other commodities and, hence, their costs have multiplied. Over the last 12 months, South African coal, Brent Crude, and natural gas prices have increased by 150 percent, 100 percent, and 500 percent, respectively. The prices of palm oil, soybean oil, wheat, sugar, and fertilisers have also risen substantially. Since we are dependent on imports, we cannot remain unaffected. Another complicating factor is the depreciating value of the rupee against the US dollar, which has made imports more expensive.
Internal market dynamics are also at work in the situation. It is well known that the prices of perishable food commodities, like vegetables and fruit, are affected by seasonal supply fluctuations. We have seen over the past months how the prices of vegetables have gone up and come down in a cyclical manner. The government’s decision to increase the minimum support price of wheat in March this year also had an inflationary impact on end-consumers.
This apart, the government’s failure lies in the fact that its administrative machinery has not been able to control market manipulators – hoarders, black marketers and smugglers – who disrupt the working of the normal supply chain to fleece the consumers. This is reflected in the increased gap between wholesale prices and retail prices. There are also reports of large-scale smuggling of wheat, wheat flour and urea fertiliser to Afghanistan, whose economy is under serious stress.
It is said that US dollars are being smuggled from Pakistan to Afghanistan, with Afghans, who are living in Pakistan, hoarding dollars in large quantities. This is one of the main reasons for the falling value of the rupee. The international prices of essential commodities, such as wheat and sugar, have seen an upswing along with a rise in shipping charges. As a result, except for the affluent class, food and fuel inflation has adversely affected a majority of the people.
To protect the common man from economic shocks from various sources, the government has reduced petroleum levy and general sales tax on fuel. It is also withdrawing and reducing duties and taxes on the import of essential commodities. But its options are limited. Considering that a major chunk of federal revenues comes from these duties and taxes, withdrawing or reducing them will certainly increase the fiscal deficit.
One way is to strengthen the rupee to make imports cheaper. But this is easier said than done, as the rupee’s strength is dependent on the state of the economy as well as the inflow and outflow of foreign exchange. If economic growth is weak and the outflow of foreign exchange is stronger than its inflow – as is the case with Pakistan these days – keeping the rupee artificially strong will deplete our meagre foreign exchange reserves which we need to meet our current account deficit.
At present, the State Bank of Pakistan (SBP) holds over $20 billion in reserves. It can sell some of them to improve their supply in the market and strengthen the rupee value. But the country will have less foreign exchange than what it needs to pay for essential imports and return foreign loans. The central bank has to maintain its reserves to avoid a balance of payment crisis. An artificially strengthened rupee encourages imports and hurts domestic manufacturing as well as export growth.
The real long-term solution to our problem lies in raising export earnings, inducing foreign direct investment, securing foreign loans and increasing the flow of remittances from overseas Pakistanis. While expats have been sending increasingly more money back home than they did in the past, export growth and foreign direct investment have lagged behind.
In the given circumstances, what we can do is to accelerate our manpower export to friendly Middle East countries. Also, we should redouble our efforts to get financial support from the International Monetary Fund (IMF) and World Bank. Pakistan should also focus more on being taken off the Financial Action Task Force’s (FATF) grey list. At the same time, by improving its security profile, Pakistan can become an unattractive destination for foreign investors.
In the meantime, the government should move quickly to save people from the effects of rising inflation. It should launch more initiatives to increase livelihood opportunities for the people on the pattern of the Kamyab Pakistan Programme. One solution is to devise a new self-employment scheme for educated youths, who should be encouraged to learn the latest technical and digital skills on the basis of which they can find jobs abroad too.