FeaturedNationalVOLUME 18 ISSUE # 13

Tsunami of inflation

The government has hiked power and gas tariff significantly to pave the way for the IMF package. Prices are already abnormally high in Pakistan and the latest hikes will trigger a new wave of inflation.

Historic high inflation is the main reason behind growing public resentment against the government and rising popularity of former Prime Minister Imran Khan, though his rule was not ideal in any sense. The situation is not expected to change drastically anytime soon, which means the common people will continue to suffer in the months to come and the government would remain under pressure from the opposition till the next election.

It is a matter of concern for the government that the rupee continues to weaken against the US dollar despite the imminent revival of the IMF package. Millions of dollars are being smuggled into Afghanistan from Pakistan every day, according to a foreign media report. Traders and smugglers take $5 million across the border daily, the report said, quoting Muhammad Zafar Paracha, general secretary of the Pakistan Exchange Companies Association. “Afghanistan has about a $10 to $15 million requirement on a daily basis,” said Khurram Schehzad, chief executive officer at Alpha Beta Core Solutions Pvt Ltd., a financial consultancy in Karachi. Half of this is estimated to come from Pakistan, he said. The afghani has gained about 5.6pc against the greenback over the past year, one of the strongest performances of any currency in the world. The Afghan currency has recovered to about 89.96 per dollar after hitting an all-time low of 124.18 in December 2021, a few months after the Taliban returned to power. Pakistan’s rupee has lost about 37pc against the US currency over the period, one of the largest declines. It fell about 10pc in one day in late January, the biggest drop in at least two decades, according to the report. The report says the smuggling really took off in the middle of last year after Afghanistan increased coal exports to Pakistan. The problem lies with Pakistan’s “flawed” immigration and trade policies and border controls. Thousands of people are crossing the border every day without visas. And many of them are carrying dollars.

The government also hikes prices of petrol every two weeks, which is the biggest reason behind instability in prices of essentials. Rates now increase daily, instead of a weekly or monthly basis. Wheat flour is becoming dearer with every passing day but the federal and provincial governments look the other way.

Prices are on the rise in the country as weekly inflation, measured by the Sensitive Price Index (SPI), increased by 0.17pc during the week ending February 9, as per data released by the Pakistan Bureau of Statistics (PBS). During the week, out of 51 items, prices of 29 (49.02%) items increased, 5 (11.76%) items decreased and 17 (39.22%) items remained stable.

Imran Khan had lost his popularity when inflation ranged between 12-16pc. One can easily guess the popularity or unpopularity of the coalition government when the inflation rate has crossed all limits. Soaring vegetable prices after damage to standing crops in the wake of flooding and a massive hike in electricity rates have also contributed to higher prices. People are receiving unprecedented inflated power bills even in the winter. It eroded the last iota of credibility of the present government.

The government hoped to contain the inflation rate at 11.5pc for the current year. However, it has quadrupled in the first few months of the year. The IMF had revised the inflation rate for Pakistan from 19.9pc to 21pc in 2023. However, prices have defied its projection. According to the Asian Development Outlook (ADO) 2022 Update, Pakistan’s rate of inflation would reach 18pc for the current fiscal year against its previous forecast of 8.5pc made in April but attributed it chiefly to the lagged impact of unsustainable energy and fuel subsidies of the previous government. It warned that the potential economic consequences of the recent severe floods heighten the already significant risks to the outlook, including the elevated inflation rate, possible fiscal slippage as general elections approach, and a higher-than-projected increase in global food and energy prices. The ADB said inflation was expected to accelerate in FY23 as new tax measures announced in the budget, together with an increase in the wheat support price and planned upward adjustments to electricity tariffs, are expected to keep inflationary pressures high.

In its latest report, Fitch Solutions warned that a reduction in crop production would also likely lead to higher inflation in Pakistan. It also expects a decrease in agricultural production to further fuel inflationary pressures in the country. “As a result, average fiscal year headline inflation will jump to 25pc from 20pc previously. Headline inflation had already accelerated from 24.9pc on Year-on-Year (YoY) in July to 27.3pc in August, the highest since May 1975. This was in part due to a 29.5pc surge in food inflation, which accounts for 34.8pc of the overall Consumer Price Index (CPI) basket. Food prices are likely to drive headline inflation upwards even further over the coming months,” it observed. Given the extent of flooding and the reduction in crop output, Fitch also expects the number of citizens facing food insecurity to rise further, posing additional downside risks to social stability.

The International Monetary Fund has warned that Pakistan’s runaway inflation could trigger protests and instability in the country. In its country report, the IMF said high inflation and tighter global financial conditions because of the war in Ukraine would continue to weigh on Pakistan’s economy, pressuring its exchange rate and external stability. The lender warned that high food and fuel prices could trigger protests and instability, which could in turn jeopardise macro financial and external stability and debt sustainability.

The finance ministry also projected elevated inflation in the wake of global and domestic uncertainties, including lower growth, especially after heavy rains and floods affecting Kharif crops. “The government has taken necessary measures to comply with IMF requirements. These have further increased inflation, but also have the positive effect of alleviating the external financing constraints. Inflation has continued to accelerate in recent months, mainly due to supply shocks that have created very significant monthly impulses on the CPI level. If these monthly impulses can be contained to more normal levels in future months, inflation may start to decelerate,” it noted.

It was earlier hoped that inflation would come down in Pakistan after prices in the international market started decreasing. However, the recent floods have dashed all hopes. It is understandable that the government is not in a position to provide immediate relief to people, but it should at least reduce prices of wheat, flour, cooking oil and pluses. At present it looks indifferent to the people’s plight. It should take action against hoarders and profiteers to prove that it is sincere about resolving public issues.