FeaturedNationalVOLUME 17 ISSUE # 45

Volcano of inflation

Prices have started declining in the country for the past few weeks but they are still abnormally high. 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 revival of a bailout package from the International Monetary Fund (IMF). The government 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.

Inflation for the week, which ended on September 22, dropped by 8.1pc compared to the previous week, mainly because of a decline in the prices of tomatoes, bananas and cooking oil. However, the Sensitive Price Index (SPI), which gauges inflation for the short term, was still over 29pc higher compared to the same week a year ago. In the past few weeks, the annual change in weekly inflation was recorded at 40.6pc (for the week ended on Sept 15), 42.7pc (Sept 8), 45.5pc (Sept 1), 44.6pc (Aug 25), and 42.3pc (Aug 18). The country has not seen this level of inflation in its history. The year-on-year change in weekly inflation was hovering around 16.5pc during the week that ended on April 14, just four days after former premier Imran Khan was ousted from power. He 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 45pc. 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. The damage to standing crops is likely to push up the prices of vegetables in the coming weeks. People received unprecedented inflated power bills in August and September. It has 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 three months of the new fiscal year. 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 have started to decrease. 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.