EDITORIAL: The government’s narrative on the reasons for inflation focus entirely on external factors: the pandemic disrupted supply chains throughout the world while the lifting of lockdowns, that had suppressed demand, has fuelled demand manifold accounting for an unprecedented rise in prices globally. There is no doubt that the international prices of our major import items notably oil and products, cooking oil and food items (sugar and wheat in particular) rose in recent months – fodder for a rise in the general price level. However, the rationale that once the prices of these items decline internationally so would domestic inflation presents an incomplete picture and one would sincerely hope that this does not reflect lack of understanding of the causes of domestic inflation today, as per basic economic theory, but a common human trait: to focus on the positives rather than the negatives while arguing that the negatives are sourced to external factors.
The above rationale can be challenged on three counts. First, the fact that even though oil prices have declined globally in recent weeks (due partly to the US government’s decision to release stocks from its reserves to bring prices down), they have remained constant in Pakistan because of the commensurate increase in the petroleum levy – a decision that has been acknowledged by the de facto finance minister, Shaukat Tarin, as a prior condition of the International Monetary Fund under the sixth review. Second, the government’s policy to import food items, including sugar (in surplus in the country today), is designed to flood the market as and when its price is artificially raised by the unscrupulous traders to earn windfall profits. And finally, domestic inflation absorbing global inflation (attributed in turn to the pandemic) is a simplistic argument as it ignores the massive rupee erosion, continuing to this day, that has led to, as acknowledged by Tarin, an undervalued rupee. Disturbingly, the undervalued rupee is increasing inflationary pressures due to increase in the cost of imported items on the one hand and, its associated benefit as per economic theory, making exports more attractive and imports unattractive, does not seem to apply to our economy in full measure. To put it succinctly, it is damned if we do and damned if we don’t.
However, there are four prevalent internal policy decisions that are fuelling inflation but are unfortunately not part of the government narrative. First, current expenditure of the government has risen from 3.9 trillion rupees in 2017-18 to 7.5 trillion rupees in the current year, a highly inflationary policy. Second, the Public Sector Development Programme with direct input into growth has reportedly been trimmed by 200 billion rupees (to 700 billion rupees) but the rise in total outlay during the fiscal year is projected to keep the budget deficit at an unsustainable level fourth year in a row which has severe implications on prices. Third, the over 8.4 trillion rupee budgetary outlay in the current year (mainly to fund current expenditure) is not backed by a commensurate rise in tax revenue due to sustained failure to implement structural reforms in the inequitable and unfair tax system. And finally, the unprecedented rise in budgeted outlay since 2017-18 has fuelled the need to borrow – domestic debt has risen from 16.5 trillion rupees to 26 trillion rupees and foreign debt from 95 billion dollars to 126 billion dollars today. This together with contractionary monetary (with a discount rate of 8.5 percent) and fiscal policies (higher taxes) and higher utility charges (agreed as prior conditions under the sixth review) are likely to constrain productivity which together with the rise in money supply to fund government expenditure through borrowing at high rates of return is unlikely to arrest inflation.
If the narrative on inflation remains focused on selective data and/or on passing the buck to external factors the government will not find much traction because such a narrative underestimates the public’s intelligence - every consumer will instinctively evaluate the purchasing power of the rupee every time he/she goes to the market. It would be preferable to present the complete picture if its narrative is to find any responsive chord.
Copyright Business Recorder, 2021