Inflation realities

Pakistan’s inflation measured via consumer price index (CPI) hit a 47-year high to 27.3 per cent in August 2022, last seen in May 1975; the full impact of massive flooding on the prices of food items and other commodities is yet to be baked into it. The CPI inflation averaged 7.94 per cent from 1957 to 2022, while reaching an all-time high of 37.8 per cent in December 1973 and a record low of minus 10.32 per cent in February 1959. The State Bank of Pakistan (SBP), though, took a penknife to a gunfight when it was dealing with an all-time high inflation. The lingering fallout of its toying with the economy’s monetary policies and botching the one job it was entrusted with have redrawn the country’s poverty map.

The bad news is consumer inflation has not peaked yet. In all fairness, the people are the real heroes behind the IMF bailout. When we pawned our economic sovereignty with the IMF to avoid a default and mobilize other inflows, we were not under any coercion. The panicked government readily did what the Fund required of it without any smart argument as the task of the economic team was to ensure a default-free Pakistan for this government to rule. What catastrophic human crisis would follow this utterly self-serving as well as politically-motivated policy was nowhere in their minds. The consequences were not pretty at all. Millions of middle and lower class households were plunged into poverty. It is difficult to say what could have been done differently in these areas to avert the ongoing inflation crisis. The energy subsidies had to go. The government had no control over oil prices, nor could it do anything to wean the economy off the expensive fossil fuels. The external environment is not helpful either, with all major economies struggling with decades-high inflation numbers. The rupee’s slide over the last few months further overburdened our economy, inflating the import bill and manifesting itself in high imported inflation. There is one area, though, where we could and should have done much better, and that is agriculture. In any case, the long and short of it is that it is understandable why inflation is raging so high at this time of the year.

Now is probably a good time to warn the decision-makers that the public mood over inflation in general and food inflation in particular is reaching the breaking point. The central bank has been projecting headline inflation to peak in the July-September quarter before tapering out through the rest of the fiscal year. That does not look realistic anymore after taking into account the inflationary impact of the floods that have wiped out crops and food stocks, the full impact of which is yet to materialize. The government must fight the temptation to win brownie points by importing food from India via triangle trade from the UAE, achieving little besides price inflation. There is a lot to be gained by importing potatoes, tomatoes, onions, and probably wheat from India on the cheap, if only in view of the already sky-high inflation our citizenry is contending with.

Bolstering safety nets is imperative at this juncture and the government will likely divert a lot of additional resources to the Benazir Income Support Programme. This, however, is unlikely to be adequate, given how inflation and unemployment are pushing more and more people below the poverty line. Under the circumstances, staying on-budget over the current fiscal – as dictated by the government’s covenant with the IMF – may not be realistic anymore. The thing is that the IMF and the rest of the world know as well as we do that we have been hit by an epic natural disaster, which will inevitably take a toll on the national economy. Is it still practical to continue enhancing the petroleum development levy? Must the government still remain hostage to the fiscal targets set before the floods? While the IMF has every right to conduct due diligence and expect the economic reform Pakistan signed up to institute as part of the Extended Fund Facility (EFF), it probably has no intention to push the country over the precipice of social upheaval. The country must use the current adversity as an opportunity to cut the rot and mobilize additional revenues through new taxation measures rather than going on a spending spree to fatten the ballot box. Any deviation will be criminal.