Pakistan’s inflation rate is the highest in South Asia and, worse still, the situation continues to deteriorate with each passing month. According to the latest official figures, headline inflation shot up from 27.4pc in August to 31.4pc in September this year. The surge in inflation is a cause for serious concern as it nullifies the various measures adopted by the government so far to curb price hikes.
The government’s anti-inflation measures have ranged from rigorous demand compression, a tight monetary policy and the ongoing International Monetary Fund-recommended reforms focusing on demand management. Experts say that despite these steps the situation has not improved and stagflation looms large.
The reason for the recent rise in inflation is the hike in energy prices but there are other factors too. In the opinion of some economists, a major factor is the large size of currency in circulation in our total money supply — as much as 39 per cent in June 2023. As is well known, uncontrolled build-up in currency in circulation fuels inflationary pressures and continues to frustrate the primary objective of interest rate tightening to curb inflation. A 31.4pc annual inflation in September 2023 implies that anyone whose income in September 2022 was Rs100,000 per month needs Rs131,400 to maintain his living standard. Similarly, those who earned Rs50,000 are now in need of Rs65,700.
Due to runaway inflation and related issues, the overall economic outlook for the country remains gloomy. The GDP growth was 0.3pc last year. This year, too, growth is expected to be low. The World Bank has predicted 1.7pc growth for the fiscal year FY24 ending in June 2024 against the government’s initial target of 3.5pc. Such a tardy rate of growth cannot reduce poverty or create jobs for millions of unemployed people. In such a situation, the joblessness rate is projected to rise to 10 percent.
Needless to say, raging inflation has devastated family budgets for Pakistanis in all income brackets. Hundreds of thousands have lost their jobs as industries and businesses have closed down, unable to cope with the rising cost of production.
What is the way out of this economic gridlock? The answer lies in taking a clutch of remedial measures, including a sharp reduction in currency in circulation and long overdue structural reforms to address issues like weak administrative controls, lack of coordination between provinces and the Centre, manipulation by market forces, low output of crops and declining productivity in the industrial sector.
The depreciating rupee value is another factor driving high inflation. Thanks to a crackdown on hoarders, exchange companies and currency speculators, the rupee has slightly recovered against the dollar. Additionally, to contain inflationary pressure the caretaker government should also consider lowering fuel prices and reduce the undue burden of taxes on electricity bills.
A cut in petroleum levy combined with an easing of international oil prices can have a positive impact on inflation. Food inflation which has gone as high as 38 percent in recent months is basically a matter of administrative control which is loose and corrupt. A crackdown against hoarders and market manipulators can produce immediate results, as the coming of hidden stocks in the market will result in immediate price reduction. To this end market committees should be reconstituted and activated at tehsil and union council levels and magistrates should be tasked with submitting daily reports on market movements of essential commodities.
Prioritising investment into productive sectors is the need of the day as much of the government expenditure is wasteful and non-productive. By international standards Pakistan’s current expenditure is too high mainly due to the liberal perks and privileges allowed to higher bureaucracy whose lavish life style is followed by the elite classes with indecent show of ostentatious living. The rich and super rich don’t pay their share of taxes, especially the feudal lords who because of their political clout get away without paying government dues.
The government has already taken some strong measures to cushion the impact of imported inflation. Excluding essential raw materials needed for our industries, the import restrictions should continue with regard to luxury items like expensive cars, fashion goods and cosmetics which we can easily do without. Despite strict controls, our imports are still more than double our exports which totally upsets our current accounts. In July-September 2023, the country’s goods exports fetched $6.9 billion, whereas imports totalled $12.2bn.
In its latest report, the Asian Development Bank has said that Pakistan has the highest inflation rate but the fourth lowest economic growth rate among all 46 economies in the region. According to the report, there are exceptionally high downside risks to Pakistan’s inflation outlook. It is a warning that the country’s economic managers should not ignore.