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EDITORIAL: Consumer Price Index (CPI) data released by the Pakistan Bureau of Statistics for May 2021 indicates inflation has risen to 10.9 percent against 11.1 percent in April 2021 and 8.2 percent in May 2020. This implies that inflation for May rose by 10.9 percent compared to the month before – a significant rise in comparison to other countries: India 4.29 percent, Bangladesh inflation for April 2021 was 5.54 percent, Sri Lanka’s 4.5 percent, Nepal’s 3.1 percent, the UK, the US and China’s consumer prices rose by less than 2 percent. Reports indicate that central banks in these countries played a critical role in containing inflation through using unconventional monetary policies (not that unconventional in Pakistan) by printing money to buy large quantities of government bonds and other financial assets.

The question is what accounts for the persistent high rate of inflation in Pakistan in recent months? The usual suspects are: (i) supply side issues defined as colluding to raise prices – a situation that prevails even in such commodities like wheat and sugar that in other countries are not susceptible to collusion as the number of sellers and buyers is too large; the existence of this factor necessitates strengthening the Competition Commission of Pakistan which disturbingly continues to seek vacation of stay orders; (ii) seasonal price variations for perishables based on their production cycles; (iii) import of cooking oil, a major factor in the rise in food prices, which is a function of its international price as well as the value of the domestic currency; (iv) while in previous months as per the agreement with the International Monetary Fund (IMF) under the 6 billion dollar ongoing Extended Fund Facility tariffs/prices of electricity and petroleum products were raised, not only in consonance with their international prices but also as important sources of government revenue, Prime Minister Imran Khan, fully supported by the newly- appointed Finance Minister Shaukat Tarin, has resisted making such price adjustments for the past month which no doubt contained CPI; and (v) the rise in subsidised credit for specific productive sectors, including the construction sector, to deal with the pandemic, the government’s rising budget deficit due to higher expenditure may have fuelled growth to 3.94 percent but has been at the cost of 10.9 percent inflation.

In this context, it is relevant to note that the Minister for Information Fawad Chaudhary has already announced that salaried class will get a big relief in the forthcoming budget. In the event that this is announced the government must be wary of wage push inflation.

These factors lead one to conclude that while the productive sectors have been energized compared to a very low base, negative 0.4 percent growth in 2019-20, they do not trickle down to the general public in terms of increasing its purchasing power. Economic pundits argue that the trickle-down theory generally does not work as cheaper credit and lower taxes do not raise employment, consumer spending or generate higher revenue for the government – a mantra that is much in evidence in the corridors of power. An IMF report authored by 5 economists titled “Causes and Consequences of Income Inequality: A global perspective” dated June 2015 rejects the trickle-down theory and argues that “increasing the income share of the poor and the middle class actually increases growth while a rising income share of the top 20 percent results in lower growth – that is when the rich get richer, benefits do not trickle down.”

In this context, it is relevant to note that the finance minister has already pledged that the government will not rely on the ‘trickle-down’ theory and instead focus on the Ehsaas programme (which remains inadequate due to paucity of funds to meet the needs of the rising number being pushed below the poverty line attributed to harsh upfront fiscal and monetary policies) as well as resistance to raise utility prices/petroleum and taxes on existing taxpayers as the way forward. These measures would no doubt contain the impact of inflation on the poor and vulnerable but at the same time not make any appreciable dent in the poverty levels.

One would hope that this would bring it home to the Prime Minister that the economy is not out of the woods yet and raising expectations does little to generate support for any sitting government.

Copyright Business Recorder, 2021


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