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CWA # 590, 28 October 2021
Pakistan Reader
Pakistan’s prolonged Inflation problem

  Sneha M

Inflation is not just a number, but rather a multi-dimensional problem. If unattended, might create “a make or break” situation for the PTI.

On 26 October, reportedly, inflation in Pakistan has surpassed a 70-year high in the last three years, with food prices doubling and some essential commodity prices reaching all-time historical levels. As per the Federal Bureau of Statistics (FSP), power rates jumped by 57 per cent from October 2018 to October 2021, from Rs 4.06 per unit to at least Rs 6.38 per unit. Additionally, according to the Sensitive Price Indicator (SPI), which benchmarks weekly assessment of price fluctuations of essential commodities, the SPI for 21st October 2021 recorded an increase of 1.38 per cent, vis-à-vis its previous week. Furthermore, the inflation rate in September stood at nine per cent, an increase from 8.4 per cent in August 2021. 

The inflation rates directly affect the social well-being of the people; with essential food commodities on a record level, citizens are finding it increasingly hard to make ends meet. This impending threat of further price hikes in primary products, the plunging value of the Pakistani rupee, and people's dwindling purchasing power have provided an opportunity for the opposition, PDM, and PPP to rekindle protests across the country. Consequently, the government and the country are only set to experience more tumultuous days.

The relationship between the economic growth and inflation
In a weekly report published by the Economist, Pakistan has the fourth highest inflation rate in the world and the highest in South Asia. Given this, fluctuations in inflation rates are pretty common across boundaries due to various reasons. Political leaders, economists, and the government of every country strives to stabilize the economy by finding a balance between inflation and unemployment. In most cases, this complex inter-connectedness results in the government's failure; nevertheless, there are success stories as well. 

The underlying approach is that when national leaders promise to scale up additional jobs to curb poverty, this is impossible to achieve without higher economic growth. Similarly, increased economic expansion is impossible without increases in the price of goods and services. So, does this mean that Pakistan's economy is in the right direction or achieving higher economic growth?

The answer is partly yes and partly no. As per the economic survey 2020-21, the country's economy has witnessed a positive growth of 3.94 per cent, compared to the previous two years. Partly no, because economists argue that inflation rates are caused due to structural problems. Factors that contribute to high inflation in Pakistan include recurring market failures and imperfect markets, weak governance, the presence of a substantial informal economy, and a lack of political will to enforce publicly fixed prices of critical goods and services. As a result, inflation continues to exceed the levels needed for economic growth.

A worrying aspect of inflation is its direct impact on the rise in food products. In the last two years, food inflation has been significantly higher than food inflation under the PTI government. Covid-19 induced lockdowns and a dramatic rise in global food commodity costs could be part of the reason. The highest increase in prices of food commodities can be noticed in ghee, oil, and sugar. A shocking increase of 108 per cent, 90 per cent, and 83 per cent, respectively. On the other hand, power rates were also increased by 57 per cent from Rs 4.06 per unit to Rs 6.38 per unit, and LPG prices have risen by 51 per cent and finally petrol prices by 49 per cent. At present, Pakistan pays Rs 127.30 per litre of petrol, the highest in South Asia.

Rationale behind Pakistan’s rising inflation
Given this background, there could be three reasons why Pakistan is experiencing inflation. First, increased money supply. When there is more money in circulation for a fixed supply of goods, then price hikes are inevitable. In order to tackle this, the country needs to adopt a contractionary monetary policy to reduce the supply of money by increasing interest rates. Then, consumption falls, prices fall, and finally brings down inflation. On other hand, IMF’s demand to increase tariffs will only make matters worse.

Second, heavy reliance on imported oil. Global oil price movements cause the rise and dip in the inflation rates in Pakistan. For instance, due to growing oil prices on the international market and the rupee depreciation, the country's oil import bill increased by over 97 per cent to USD 4.59 billion in the first quarter of October from USD 2.32 billion in the same period last year. Therefore, Pakistan must diversify its energy reliance on oil and move towards renewable energy resources to overcome this.

Domestic supply shocks are the third factor to consider. Natural disasters, pandemics, locust invasions, and other events can all cause supply shocks within the economy. Arming the country with resilience mechanisms, on the other hand, may have long-term benefits.

Proposition for the Future
In conclusion, inflation can be a multi-dimensional problem. Its socio-economic impacts on the lives of people must be resolved and met with structural reforms. Additionally, PTI must not deny the current economic turmoil, and it must set realistic and achievable targets, be it increasing employment, steady economic growth rather than looking at it ideally. For example, according to the Economic Survey 2020-2021, 71 million people lost their jobs due to the Covid-19 lockdowns, and the country's unemployment rate was 16 per cent, not the government's assertion of 6.5 per cent. If unaddressed, these might create an "a make or break" situation for the PTI in the upcoming elections.

References
Angana Chakrabati, “Pakistan’s inflation breaks 70 year record in 3 years of PTI government,” The Print, 26 October 2021
Umair Jamal, “Tumultuous Days Ahead for Prime Minister Imran Khan,” The Diplomat, 27 October 2021
Imtiaz Ali, “Opposition parties take to streets across Pakistan against ‘back-breaking’ inflation,” Dawn, 22 October 2021
Mohiuddin Aazim, “Inflation deserves more serious actions," Dawn, 19 July 2021
Nadir Cheema, “Inflation in Pakistan: multiple causes,” Dawn, 11 March 2019

 

*Note: The note was first published in http://www.pakistanreader.org/

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