LAHORE: The Pakistan Industrial & Traders Associations Front (PIAF) has warned the authorities that inflation above 6 percent can hurt economic growth in Pakistan and a careful policy is required to keep it in control.
PIAF Chairman Faheem Ur Rehman Saigol, quoting the data, observed that trade and industry have suffered from the double-edged sword of food and energy prices with transport inflation peaking to a record 65% while the annual inflation rate increased to 24.9% in July 2022.
PIAF chairman said that there is a consensus that a low inflation rate helps economic activities, while high inflation hurts economic growth. The high inflation environment affects decision making of all economic agents in economy, like investors, savers, consumers and producers through uncertainty about the expected payoffs from their decisions.
Moreover, a persistently high inflation also causes erosion of the value of the local currency in terms of foreign currencies. Such uncertainties, in turn, have adverse implications for economic activities.
He said the IMF loan would have devastating effects on the economy, as with more taxes and increased rates of utilities, cost of production have been further increased. This will render Pakistani exports uncompetitive in the global market.
He said that it is the highest increase in consumer prices since October 2008 amid a steep slide in the value of the rupee that slipped to a record low of Rs239 to a dollar last month, contributing to a big price shock.
Transport prices recorded the biggest increase of nearly 65% on back of petrol prices that saw 94.4% increase in urban areas and almost 100% in rural areas, followed by food. The monthly inflation rate jumped 4.3% in July over June–probably the second highest increase in a single month in the history of Pakistan.
Amid skyrocketing prices, the government has also directed the Federal Board of Revenue to prepare a mini-budget of Rs30 billion to compensate the supplementary grant of the same value that the Economic Coordination Committee of the Cabinet approved for the Pakistan State Oil.
However, the trade and industry no more have the capacity to bear the burden of additional taxes, as they have been forced to pay record petrol, electricity and gas prices in addition to an increase in their tax burden in the budget.
The core inflation, calculated after excluding the volatile energy and food prices, also surged to 12% last month in urban areas and 14.6% in rural areas, which may become an excuse for the State Bank of Pakistan to further increase the interest rates.
The SBP had increased the key policy rate to 15% to curb inflation and correct external sector imbalances. The central bank so far failed to contain inflation despite almost doubling the interest rates.
Chairman PIAF said low inflation helps economic agents to predict outcome of their economic decisions with fair level of certainty. Especially, producers follow their plans for business expansion with more confidence; and new investment is undertaken in the expectation of predictable returns.
He said that the most serious threat to the economy in the new fiscal year would be inflation owing to the high spending of the government, triggering inflation further. He said the government plan of assistance from International Monetary Fund has brought a fresh wave of price-hike, as inflation is already hitting due to continuous raise in oil prices and depreciation of local currency.
Copyright Business Recorder, 2022
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