FeaturedNationalVOLUME 16 ISSUE # 07

Ostrich approach to inflation

Prime Minister Imran Khan believes the opposition is twisting the facts about inflation and prices are not as high as it is projecting in its public meetings. His approach is contrary to the ground realities and indicates people will have to live with crushing inflation in the remaining period of his term after facing the hardest times of their lives since his installation.

It is highly unjust to believe that prices are at a reasonable level in Pakistan and only the opposition and the media are twisting the facts. In fact, international reports suggest Pakistan as an exception in the South Asian region for having high inflation, in contrast to mostly a stable inflation rate in the region on the back of weak domestic demand and broadly stable currency markets. Flour and sugar crises and shortages and high prices of vegetables have made the lives of the common people miserable but the government is rubbing salt into their wounds by claiming that prices are not high. The State Bank of Pakistan (SBP) has projected full-year inflation in the range of 7-9pc while the International Monetary Fund (IMF) anticipates it at over 8.8pc for the year.

Data released by the Consumer Price Index proves people in Pakistan continue to pay higher prices, especially for food items, mainly due to supply constraints as the government has yet to overcome the shortage of essential commodities, like wheat, sugar and vegetables. A surge in doctors’ fee, medicine prices and the cost of warm clothes ahead of the winter also contributed to high prices in the country in October. “The national Consumer Price Index (CPI) of October increased by 8.91pc over the corresponding month of last year i.e. October 2019,” the Pakistan Bureau of Statistics (PBS) reported. It was slightly lower than 9pc inflation in the previous month of September and 2.09 percentage points lower as compared to 11pc in October 2019. The PBS reported that the rural CPI inflation rose 7.32pc in October on a year-on-year basis while urban inflation soared to 11.31pc. The price of tomatoes increased by 66.93pc in rural areas in October compared to the same month of last year; potatoes become costlier by 53.14pc, wheat 52.21pc, eggs 43.32pc, pulse (moong) 40.94pc, beans 37.91pc, condiments and spices 36.6pc, pulse (mash) 35.64pc, sugar 32.97pc, wheat products 31.52pc, wheat flour 24.67pc, butter 22.74pc, pulse (masoor) 19.88pc, chicken 18.22pc and vegetable ghee 15.76pc. Besides, the cost of water supply increased by 18.92pc, waste collection 16.26pc, doctor clinic fee 14.73pc, woollen clothes 13.48pc, cleaning and laundering 11.39pc, furniture and furnishing 9.7pc, marriage hall charges 7.55pc, drugs 6.91pc, hosiery 6.7pc, construction input items 6.13pc and construction wages 5.78pc.

Prices of flour and sugar have not stabilized even after their imports. The government remained in a state of denial over their shortages and claimed the crisis existed only in the media, which was hell-bent to malign its image. Tomato prices had surged sharply in the country a few months ago, but it did not damage the credibility of the government as did the flour and sugar crisis. The shortage was perhaps the last straw. The common people were already facing the toughest times of their lives in terms of rising living costs fuelled by record-high food inflation when the crisis occurred.

Pakistan’s growth rate is expected to remain lower than estimates by national and international institutions. The government has introduced reforms which have added to problems of the common people and depressing forecasts mean there is no prospect of relief for them anytime soon and they will continue to suffer in years to come. Pakistan’s major challenges are stabilisation and protection of the economy against external risks, rising global prices, current account deficit, rising debt servicing, and continued losses of public sector enterprise. Missed revenue collection is compounding the problem. To compound the situation, the World Bank has lowered Pakistan’s growth rate projections for the current fiscal year and the next two years but forecast a 3.9pc growth rate in FY2022. In its latest report “2020 Global Economic Prospects”, it forecast Pakistan’s current year growth rate at 2.4 per cent — about 0.3pc lower than its estimates of June 2019 — before touching 3pc next fiscal year and 3.9pc in FY2022.

The report pointed out Pakistan as an exception in the South Asian region for having high inflation, in contrast to mostly a stable inflation rate in the region on the back of weak domestic demand and broadly stable currency markets. It noted the regional outlook for 2020 has deteriorated recently, and risks are tilted to the downside. Financial sector weakness will likely weigh on activity unless balance sheet vulnerabilities are addressed. For countries with elevated debt levels and large current account deficits, like Pakistan and Sri Lanka, an unexpected tightening in global financing conditions could sharply raise borrowing costs and lead to stops in capital inflows.

Growth in the region is expected to rise to 5.5pc in 2020, assuming a modest rebound in domestic demand and as economic activity benefits from policy accommodation in India and Sri Lanka and improved business confidence and support from infrastructure investments in Afghanistan, Bangladesh, and Pakistan. Significant depreciation of the Pakistani rupee resulted in inflationary pressures. Monetary policy tightening in response to elevated inflation restricted access to credit. The government retrenched, curtailing public investment, to deal with large twin deficits and low international reserves. Pakistan’s budget deficit rose more sharply than expected. Contributing factors were a shortfall in revenue collection, combined with a sizable increase in interest payments.

The bank expected macroeconomic adjustment in the country including a continuation of tight monetary policy and fiscal consolidation. However, the lower growth rate forecast is in line with a similar (0.2pc) decline in the global growth rate during the current year and 1.5pc decline in the South Asian region. Growth in Bangladesh is projected to remain above 7pc through the forecast horizon, growth in Pakistan is projected to languish at 3pc or less through 2020 as macroeconomic stabilisation efforts weigh on activity. Growth in India is projected to decelerate to 5pc in FY2019/20 amid enduring financial sector issues.

According to the State Bank of Pakistan, it is vital for the government to continue to address the underlying structural vulnerabilities and put the economy on a balanced and sustainable growth trajectory. Besides, the government will have to accept the fact that prices are beyond the reach of the common man. It will have to take urgent measures to prove the opposition wrong. The government, especially in the Punjab and Khyber Pakhtunkhwa, where the Pakistan Tehreek-i-Insaf (PTI) rules, cannot absolve itself of profiteering, hoarding and black-marketing by retailers. It has left the people at the mercy of mafias while it does not require money to take action against them. People want more serious efforts from the government to bring down prices than banking on volunteers of the Tiger Force.