High inflation: no room for excuses

High inflation is a harsh reality today in Pakistan that needs to be acknowledged. It's hurting the lower and middle economic classes. The food inflation in Pakistan already has increased by over half in the past three years (48% since Aug 18), and now the global inflationary season is hitting as well. Earlier, the food price increase brunt was harsher for the marginalized segments of society. Now the global commodity prices' impact is putting strain on the urban middle classes as well. Then the energy-related pending adjustments - power and gas - are seemingly inventible to avoid-and will add to the agony. Then the drip-by-drip currency depreciation is draining the sentiments.

There are both local and global factors for the ongoing high inflation. There are both demand-pull and cost-push reasons for recent inflation. There are both structural adjustments - due to hangover of past and no meaningful actions in past three years, and inefficient management (particularly in food and energy) responsible for higher inflation outturns.

Over the past three years, food inflation has been marginally higher in the rural economy - Rural Food CPI has increased by 50 percent, compared to 47 percent for Urban Food CPI. Urban dwellers are feeling the brunt. Unfortunately, the exceptions are the rich, who are minting money and is evident by consumption of luxury items (such as Fortuner and Hilux sales have doubled in 4MFY22 versus those in 4MFY18, and other compact SUVs segment was missing in 2018), higher real estate prices, and growing corporate earnings. High end restaurants in big cities have waiting lines. Plethora of mega luxury construction projects are in the making. The government stimulus in response to Covid-19 (such as real estate amnesty, TERF and higher agriculture produce support prices) are probably not trickling down from rich to lower/middle classes.

However, sales of motorbikes and smaller cars are higher than 2017-18 levels in 2021-22 so far - but growing at a lower pace than high end vehicle. Sales of fertilizer, domestic cements sales, petrol sales, and power sector units sold in 4MFY22 are the highest ever in quantity. The banking sector deposits growth in 2021 is highest since 2007. Money supply (M2) growth in FY20 (17.4 percent) and FY21 (16.2 percent) were higher than all years since 2007. Apart from banking numbers (which are nominal), all are real numbers. But these numbers of growing consumption do not mesh well with the sentiments of purchasing power erosion on mainstream and social media.

It could mean that although inflation is hitting hard, businesses are making more money and consumers are spending. Growing demand and its inflationary consequences are self-evident in the shape of higher money supply. The negative real rates and flurry of remittances flows are also boosting demand. Then the cost push factors may also have made their contribution to inflation - such as higher international commodity prices, currency depreciation, passing on of the increase in energy cost to consumers, and increase in agriculture support prices.

The incumbents are in the right to take credit for higher sales in FY21 and 4MFY22 which is due to inertia of slow growth in FY19 and FY20, pandemic-related stimulus, and its pro-industrial policies (as well as capacity expansion committed in the last regime such as in power and cement). However, it should also have the courage to face the brunt of inflation. After all, economic choices always result in trade-offs. It is for the people to decide whether the decision-making by policymakers reflects right trade-offs.

One of many reasons for a hue and cry is that social media is much more popular today than in the past. Unfortunately, government spokespersons insist on lame narratives, especially in defense of inflation. Just to give a perspective, food inflation in the first three years of PPP government was 64 percent (higher than in PTI's first three). But unlike PTI, PPP government did not feel the need to defend every economic indicator. Moreover, before that PPP term- during Musharraf's rule - income levels had grown significantly, and food prices (prior to 2008) in Pakistan were at steep discount to international prices. Effects of media deregulation were also recent, and PPP leadership did not adopt a hostile attitude towards media, even though it faced criticism for a struggling economy, just as PTI does.

The government must show empathy for mass suffering among people. It alone is responsible for not taking any steps for structural reforms in early days. The power sector tariffs need an upwards revision as there are lumpy debt capacity repayments for new projects. The bigger projects - hydel, nuclear, and LNG - are government-owned. Did the government take any step to extend the tenure of the debt portion for those projects? All it did was to renegotiate with 94/2002 policy IPPs (Independent Power Producers), whose impact was minimal. Why did the government not take any step for gas sector deregulation in the past three years?

Now when the external payment crisis is hitting hard, government ought to take steps which were committed with the IMF in 2019. Timing is coinciding with global inflation spillover. There is no magic wand to bring inflation down. Things will take time. The whole structure is weak. Hoarding is a natural consequence of growing international prices in a highly informal economy. That is also contributing to domestic food inflation, among other structural weaknesses. What has this government done to deregulate the agriculture markets or address its structural weaknesses? With over Rs7 trillion currency in circulation, monetary policy transmission will always have limited efficacy to bring inflation - especially food inflation - under control.

And one reason for negativity on social media is growing income and wealth disparity. The gap between 'haves' and 'haves not' has widened in the past three years. The government must work on fiscal and other policies to ensure growth of middle class, and to take people out of poverty. Not much time is left for the PTI government. It is time to salvage, better act quickly.

Copyright Business Recorder, 2021