Double-digit inflation

According to the Planning Commission findings the cost of a minimum food basket escalated by 79 percent during the four years of the current government thereby fuelling malnutrition and poverty. These damning statistics are in line with general inflation which went up by 73.5 percent in the same period. No doubt external factors have played a significant role in domestic price escalation - a claim that is supported by the steady erosion in the nominal rupee value from an average of 62.5 rupees to the dollar in 2007-08 to over 90 rupees per dollar in four years due to the adjustment for inflationary differential vis-a-vis our competitors and trading partners. A steady rise in the price of oil, due to the Arab Spring as well as the escalating tensions between Iran and the US-led West, has accounted for a massive rise in our oil import bill. In 2007-08 Pakistan's total oil and products import bill was 7.2 billion rupees, which rose dramatically to 12.3 billion rupees in 2010-11. The State Bank of Pakistan website makes a provisional estimate for the current fiscal year at 9.87 billion rupees for July-February 2011-12 - around 2.5 billion rupees in excess of the corresponding period last year. Another external factor that continued to negatively impact on our balance of payment position was the global recession, however significantly this factor did not impact negatively on our exports which rose to 25 billion rupees last year and are forecast to be around 16.2 billion rupees during July-February this year - 843 million dollars more than in the corresponding period last year. Exports growth has slowed to 3.9 percent compared to the 189 percent rise during first half of last year. The expected fall in textile sector exports is likely to persist possibly into the next fiscal year as well. This is indeed worrisome and requires a closer re-look at our balance of payment position. Additionally, the global recession has compromised the capacity of Western nations to meet their pledged assistance to Pakistan under the umbrella of Friends of Democratic Pakistan. While one can dismiss external factors over which the Pakistan government has little or no control, yet one cannot so easily dismiss internal policies that, without doubt, did play a key role in fuelling prices of those items that account for the bulk of the income of the poor in a given month. There is little doubt that the prices of oil and products were raised in line with their international price. However, these items are taxed - there is a petroleum levy as well as sales tax that, according to the formula, rises with a rise in the price of the commodity - therefore the government cannot lay the entire blame for a rise in the domestic price of oil and products on the international price. Thus with a rise in fuel prices the cost of transportation escalated sharply with its consequent impact on the income of the poor. The government was also lax, and continues to be lax, in meeting electricity demand which has accounted for national productivity below capacity as well as lay-offs in various industrial towns and cities around the country. Again part of the reason is external, due to rising costs of oil, but part is internal as the government fails to contain the inter-circular debt thereby compromising the capacity of the sector to pay for oil imports or contain the massive transmission losses. Instead it has focused on eliminating the inter-disco tariff differential through large annual injections that in effect indicate support for the poor performing discos. And finally due to paucity of external funding, attributed to the failure to get a Letter of Comfort from the International Monetary Fund which accounts for cessation of programme (budgetary) assistance the government has increased reliance on domestic borrowing. This is a highly inflationary policy as it is not backed by an increase in productivity. In the past year domestic borrowing escalated considerably. Thus while foreign debt servicing declined - from 76.7 billion rupees in the budget for 2010-11 to 74.4 billion rupees actual payment due to the non-materialisation of foreign lending - domestic debt servicing rose from the budgeted 621.7 billion rupees to 653.6 billion rupees last year and is budgeted to further rise to 714.6 billion rupees this year.The top leadership appears to be more interested in project lending. There is much more to running the economy than approval of pork and barrel projects. There is an urgent need for the government to turn its attention towards arresting the inflationary spiral that is raising malnutrition and poverty levels in the country. The government's approach so far has been to make cash transfers under the Benazir Income Support Programme, however, there is an urgent need to arrest the erosion of the rupee both domestically and internationally through significant curtailment of current expenditure (the government has so far relied exclusively on decreasing development expenditure while raising non-development expenditure), enhanced revenue generation through the levy of equitable as opposed to inequitable taxes (which would raise the tax-to-GDP ratio) and reduced domestic borrowing to reduce inflation. Copyright Business Recorder, 2012