Inflation is on the rise as evidenced by year-on-year Consumer Price Index (CPI) national headline inflation at 9.2 percent for October 2021. The Jul-Oct average CPI at 8.74 percent was the same as for the corresponding period last year. But the “single-digits” inflation is no cause for celebration as all indications remain in an uptrend.
No doubt, a sharp 11 percent year-on-year fall in perishable food prices has brought down food inflation back to the single digits. But the month-on-month trend is still rising, with perishable food prices going up by 6 percent from September 2021. The real problem is the non-perishable food prices, which have continued to rise in double digit figures.
All government policies are now focused on measures to subdue inflationary pressures in the economy. There is no quick fix or short-term remedy, but it requires patient and consistent action immediately to produce results in the medium and long-term. It is natural for the government to seek short-term solutions, but the real remedy lies in adopting long-term policy decisions.
These include expansion of domestic productive capacity and keeping it aligned with growth in aggregate demand. Productivity in both farm and non-farm sectors have to be raised. Secondly, authorities should pay more attention to resolving supply bottlenecks and encourage efficient import substitution. For example, Thar coal is much cheaper than imported coal and its use should be encouraged. Gasification of coal is another possibility that needs to be explored. Renewable energy projects, such as hydel, wind and solar resources, ought to be given priority to cut expenditure on expensive fuel imports.
Export growth, particularly in new sectors of the economy, is the need of the hour. To this end, various constraints faced by the exporters should be removed. In a world dominated by global value chains, tariffs on imports of components and intermediate inputs act as a tax on exports. In the last few years, IT exports have gone up but the scope for further expansion is quite large. The obsession with tax increase should be replaced by a passion for promoting industrialisation. We need to focus on factors that would make Pakistani exports competitive in the world markets. The aim should be to attain a sustainable position where exports of goods and services can finance up to 80 percent of imports, reducing trade imbalance. There is also an urgent need to reduce the costs of international trade transactions and increase returns to the exporters.
According to experts, targeted subsidies can go a long way to cushion the impact of inflation on the poorer sections of society. There is a need to move away from the present system of across-the-board subsidies on wheat, electricity, fertiliser, seeds etc to a system of targeted subsidies. This would result in savings on public expenditure and enhance the well-being of deserving households. The impact of the targeted subsidies in the farm sector for promoting production of oilseeds, pulses and other commodities would be significant.
Better administrative controls, timely procurement, releases and allocations can also help stabilise the market. Hoarding and black marketing create shortages which need to be curbed with a heavy hand. Better reserve stock management for wheat and other commodities can be helpful in dealing with market distortions created by smugglers and hoarders.
Savings and investment play an important role in containing inflationary pressures. As things stand, we need to double both domestic savings and investment rates over time. This will not only make for higher growth rates but also reduce dependence on foreign loans. We will be in a comfortable position to finance our trade imbalances through non-debt creating external inflows, such as foreign direct investment without resorting to extensive borrowing. Domestic savings are a mixture of private household, corporate savings and public-sector savings. Containing the fiscal deficit to a manageable level and restructuring and privatising SOEs are urgently needed to control the current account deficit and keep inflation at bay.
Inflation is a worldwide problem, which has worsened in the wake of the sudden spike in the global prices of oil and gas. Fuel prices have gone through the roof everywhere. Each country has its own set of problems and priorities and is doing its utmost to control the situation. In Pakistan’s case, the choice is clear. We must take the necessary measures to shield the most vulnerable sections through targeted subsidies and keeping the rates of essential items, like flour and pulses at the lowest level.