The challenge of rising inflation

Inflation occurs when spending on goods and services outstrips production. Prices can rise because of supply constraints that increase the cost of producing goods and offering services or because consumers, enjoying the benefits of a booming economy, spend their excess cash faster than producers can increase production.

Inflation is often the result of some combination of these two scenarios. The COVID-19 momentary grip over the economy has eased. Notwithstanding the quirky weakness of reported growth in the third quarter of 2022.

Inflation is now the primary economic problem confronting Pakistan. Prices are surpassing income growth for most people, eroding their living standards, and higher interest rates will help restrain price increases.

More recently, Russia’s invasion of Ukraine has wreaked havoc on the global oil and wheat markets, driving up gasoline and food prices in many parts of the world. Before these global commodity and manufacturing market shocks, people were already losing patience with rising prices. As the price of food and electricity rises, cries for help are growing louder. People want their economy back to when unemployment was low and prices were stable.

The first thing to realize is that price rises are not always bad. In reality, inflation that is kept under control is a sign of economic prosperity. As a consumer, if you received higher quality goods and services, you would be willing to pay more. As a manufacturer, you will invest in and increase quality in order to get that higher price.

However, you will be acquainted if the quality of your consumption does not improve while you are still obliged to pay a higher price. The higher prices will simply reduce your purchasing power without making you better off. On the other hand globally, inflation has intensified due to the Russia-Ukraine conflict and renewed supply disruptions caused by the new COVID wave in China bringing lockdowns back to the (woefully under-vaccinated) workshop of the world.

As a result, almost all central banks across the world are suddenly confronting multi-year high inflation and a challenging outlook. Currently, we are using the contractionary monetary policy tool, which is the most prevalent method of controlling inflation. A contractionary policy aims to shrink an economy’s money supply by lowering bond prices and raising interest rates.

This helps to curb spending because when there is a finite quantity of money available, individuals who have it prefer to save it rather than spend it. Last month, the central bank raised its benchmark interest rate by 150 basis points to 13.75 percent. It has subsequently signaled that headline inflation is likely to increase temporarily and may remain elevated throughout the next fiscal year.

Following that, it is expected to fall to the 5-7 percent target range by the end of FY24, owing to fiscal consolidation, moderating growth, global commodity price normalization, and beneficial base effects.

While interest rate policies get headlines, there is so much more that needs to be done. In our case, high inflation is more due to (a) weak economic fundamentals; (b) inefficiency in our agricultural productivity that leads to food inflation; and policy stimuli of concessionary financing of non-development expenditures.

According to the State Bank of Pakistan, the people of Pakistan have been hit hard by rising food prices in recent years, with double-digit year-on-year food inflation numbers observed in most months since mid-2019, reaching as high as 17 percent in April 2022 and 15.9 percent in April 2021 amidst lower fluctuations.

Staggered and unpredictable agricultural output, inefficient use of essential natural resources, particularly water, and inadequate innovation, as well as weather-related shocks, are the root causes of price hikes. Ineffective government initiatives have worsened the dismal performance. There are four areas where priority action should be taken to make food more affordable, particularly for the poorest people.

The wheat procurement mechanism should be overhauled, increase the level of competitiveness in the sugar industry, encourage high-value, climate-smart farming and with technical assistance from the UN’s Food and Agriculture Organization (FAO) and the World Bank, improve monitoring, forecasting, and coordination.

Furthermore, Pakistan’s ability to meet its fiscal and external deficits has long been reliant on borrowing from local and international institutions, with the debt-to-GDP ratio floating around 71.3 percent.

Nevertheless, in Pakistan, inflation is a socioeconomic issue that requires a complete socioeconomic approach as well as an efficient and comprehensive administration methodology on the field. Inflation is projected to continue high in several nations in a coming fiscal year 2023; though, provisions of inflation expectations over the medium and long term can be got closer to low targets and indicators. Our goal in Pakistan must be to regulate the availability of commodities and cheaper fuels, improve the efficiency and effectiveness of competitive markets, prevent the rupee from undervaluing, and keep the pace of monetary stimulus in the low double digits. Moreover, people must be educated on how to behave rationally and disengage from the “excessive spending mindset.” In order to return our country to a normal economic path.

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Copyright Business Recorder, 2022