A 100 rupee note in your wallet would not buy you same amount of flour after a year as today. Why? Because of inflation. It’s a decrease in purchasing power of currency or simply an increase in cost of living. Rising inflation has insidious effects on individuals and corporations, it has plunged countries like Pakistan into instability. The incumbent government is lambasted for increasing prices of essential goods because it has entrapped low income households in poverty.
Established economic barometer to measure inflation is Consumer Price Index (CPI), which tracks the cost of fixed basket of goods and services in a consumer market. According to Pakistan Bureau of Statistics (PBS), CPI stands at 9.7% in June over the same month a year ago (YoY). If we further delve into the calculation, we conclude that around 70% weightage is occupied by food, shelter and health consumables, which explains the premise why low-income households are mercilessly affected by this menace.
The outbreak of pandemic proved a catalyst in the economic downturn of Pakistan, in order to mitigate the adverse effects of ongoing pandemic and to stimulate growth to achieve aggressive targets set by IMF; the State Bank of Pakistan adopting reduced the policy rate by 100 basis points to 7% in its monetary policy statement issued on June 25, 2020 and kept it unchanged since then, this measure along with SBP’s low mark-up financing schemes helped businesses to parry the ruinous effects of pandemic, however, the trade-off of the above decision is increased inflation because of increased spending. Another dilemma in lowering inflation is the collusion of corrupt mafias in possession of ill-gotten gains having strong hold over state’s planning machinery have escalated the prices of essential commodities. This diverts the focus and resources of the state from more productive and efficient use and concomitantly earns a bad name to the incumbency. Further, on one side mobilization of resources from rich countries to the domestic state in the form of foreign aid and remittances contributes towards increased foreign exchange and short-term prosperity but at the same time this fuels inflation owing to the significantly devalued home currency. Another determinant of domestic price level is the international crude oil prices, which are on a rising trajectory thus have knock-on-effects on wages and retail prices.
Due to the interplay of the above forces, it is evidently a daunting task for the state to control inflation. Every economic move would involve trade-offs therefore an optimum balance must be sought among pool of courses. First of all, Government of Pakistan (GoP) should enhance the production potential of the domestic resources which will increase the output supply thereby putting a downward pressure over rising prices, it can do so by devising investment friendly fiscal cum monetary policies, which will attract investments from abroad thus limiting the need for imported items. Waging a war against corrupt mafias had never been trouble free, speculative trades inflate prices and lead to artificial price bubbles and crises when these bubbles burst, the GoP should indulge local administration and concerned state departments, Competition Commission of Pakistan, National Accountability Bureau, Financial Monitoring Unit, Federal Board of Revenue (FBR), SBP and others with rigorous accountability in order to thwart the exploitation of masses. Moreover, in order to combat high inflation, a vital monetary measure is the demonetization of PKR 5,000 note and minting new currency notes as it would redress the adverse impacts of hoarding and corruption by increasing economic transparency through the documentation of previously shadow market.
With inflation still high, the central bank should resort to hawkish fiscal and monetary policy measures by adopting inflation targeting policy i.e. by setting and achieving explicit target for inflation rate, thereby gradually raising policy rate without dampening investment and growth. Keeping a tight rein on non-developmental expenditures supplemented by progressive taxation schemes, where high income individuals are taxed using proportionately higher taxation rates, would curb inflation. It is the responsibility of the state to ensure continued supply of essential goods at low prices to its citizenry by adopting drastic measures, be it by lowering export quotas, controlling smuggling and lowering import duties on vital supplies. The ongoing economic challenges faced by Pakistan portend severe economic recession ahead which would potentially aggravate the agony of poverty-stricken nation.
However, as they say: where there’s a will, there’s a way, the state needs to demonstrate unprecedented commitment and efforts to prevent the derailing of economic train.
–The writer is a student under apprenticeship in a private
organization in Islamabad and is accessible at [email protected]