Hard times

The year 2022 has got off to a start which will leave most citizens extremely worried -- about where the money for the next electricity, gas and petrol bill is to come from – due to the renewed pressure from the International Monetary Fund (IMF) to streamline Pakistan’s economy. Though there is talk about inflationary pressure easing out in 2022, the prognosis is not all rosy. The monetary tightening imposed towards the end of 2021 will have its impact in the first quarter of 2022. The most significant pressure from the IMF on the government of Pakistan is about managing its fiscal balance. This balance the government can achieve – if at all – by checking its current account deficit. This in turn involves a prudent maintenance of economic growth momentum. So now the economic managers of the country have to face this triple challenge in the face of the IMF pressure: one, fiscal balance; two, the current account deficit, and three, growth momentum. The 250 basis points interest rate tightening since the last week of November has not helped much. Even before that, the shortage of gas and electricity had started taking its toll on the growth of industrial production. This resulted in a decline in large-scale manufacturing output growth that reached a point of just 3.5 percent below year-on-year from July to Oct 2021. This was compounded by the current account deficit at 5.3 percent during almost the same period.

To ease the pressure from the IMF the government planned to contain import growth by tightening the monetary policy but the CAD still persists. This gives us a scenario in which economic growth in 2022 is likely to suffer due to compression in demand that comes associated with an erratic supply of energy to industries. This compression in aggregate demand will reflect in decelerated growth rate of consumer credit. Mortgage finance may show slightly better performance thanks to the government’s ongoing Naya Pakistan Housing Scheme. A positive sign on the horizon is that international fuel prices have started easing at the turn of the year and as the global economy is growing slower than expected there are minimal chances for oil prices to shoot up. The pressure on foreign exchange rates is also likely to continue with the dollar now hovering around Rs180.

If slower growth in aggregate demand continues in the coming months due to monetary tightening, there will be other effects such as on consumer inflation. Perhaps the most noticeable impact will come from the current energy crisis, if it persists and energy products are made even costlier more frequently, the prices of essential items will need proper administration otherwise inflation will remain stubborn. The poorer sections of population have been braving a higher level of inflation for at least the past three years now. Despite all the pressure, the government must strive to contain the prices of nearly 50 essential items of the SPI basket such as milk, pulses, rice, sugar, and wheat flour. There is a need for strict enforcement of laws governing overpricing and unfair market rates. Just by announcing one package after another as a political stunt, the government cannot control the situation.

At the same time, we have political unrest with the PDM planning a long march to Islamabad against inflation, on March 23 this year. Maulana Fazalur Rahman is pressing ahead with these plans. Of course, we do not know yet whether this march will eventually go ahead. But the lack of cohesion between the political parties at this time when the needs of the country are enormous is disturbing. The IMF regime has made it extremely difficult for people to manage and there is every indication that this year will bring unprecedented hardship for people everywhere as they attempt to cope with rising prices in a situation where there is no increase in their salaries, and no improvement in the quality of their lives.