LAHORE: Inflation’s most obvious target are the poor, but here in Pakistan it has reached a stage where all segments of the economy are getting affected.
Economies face inflationary pressures due to various factors that include increase in commodity rates, increase in wages, liberal monetary policy, huge fiscal deficit, and declining currency value.
Then there is cost-push inflation that occurs due to increase in inputs and the last type is demand push inflation when buyers outnumber the suppliers. Pakistan is facing all types of inflation.
Food inflation for instance is caused either by food shortages or by managed hoardings. Both are happening in our country. Rates of global commodities increased due to supply constraints after the pandemic, while record high transportation charges in many cases exceeded the actual cost of the goods.
Though the policy rates in Pakistan are the highest in the region, they are much below the prevailing inflation level and do not act as a guard against inflationary pressures. Fiscal slippage has been a regular contributor to inflation since the start of this century. The sharp decline in rupee value is the result of flawed government policies that triggered imports to alarming levels.
Around three to six per cent inflation is good for sustained growth. However, when inflation crosses a reasonable limit as at current 13 percent it has negative effects. It reduces the value of money, resulting in uncertainty of the value of gains and losses of borrowers, lenders, and buyers and sellers. The increasing uncertainty discourages saving and investment.
Foreign investors have seen their incomes reduced as inflation has reduced the value of Pakistani rupee by over 40 per cent in last 40 months. Earlier they repatriated their income at the rate of Rs124 a dollar, now they must pay Rs176 for one dollar.
Their costs in Pakistan have increased due to local inflation and the profit margins have declined despite increase in rates of their products. Domestic manufacturers get working capital at 15 per cent. They must first earn this much just to pay back to the banks and then earn another three to four per cent just to cover recurring expenses like wages, electricity, and gas bills etc.
This is asking too much from them as inflation has remained stubbornly high, increasing their production cost. The rates of their products have not increased corresponding with the increase in cost.
Importers generally have to bear the higher cost of dollar, most effectively compensated through rampant under-invoicing. With inflation hovering over 13 per cent, the banks cannot afford to lend money at lower rates. Lending at lower rates would mean diluting their assets.
For instance, if they lend Rs100 at 13 percent that is a very high rate, and the inflation is also 13 percent then in real sense the value of Rs100 they lend would be the same after accounting for the inflation, while they must pay interest to their depositors.
The modern definition of inflation is persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money. Both the definitions are applicable in Pakistan’s case.
Higher food rates or oil prices are not the only factors that created inflationary pressures on the economy. Other factors include higher indirect taxes imposed by the government like rise in the rate of excise duty, an increase in fuel duties or an extension to the range of products to which GST is applied.
Pakistan is also facing cost-push inflation as businesses responding to rising production costs, have raised prices to maintain their profit margins. Rising labour costs are another factor particularly as it is not accompanied with any improvement in productivity.
High inflation has redistributed income from fixed income earners (for instance pensioners) to owners of assets and earners of large and variable income, such as profits. In fact anyone whose income isn't indexed to inflation has been adversely affected. Inflation affects them especially hard because the prices of things they buy go up while their income stays the same.
Managing inflation is a tedious job that requires prudent decisions and strong political will of the government. All economists agree that uncontrolled inflation as being faced by Pakistan devastates the economy.
They say that governments must keep a balance between growth and inflation because you can neither strangulate inflation nor allow it to go out of hand. Workers observe rising prices and demand compensation in the form of higher wages, which creates a vicious cycle of more inflation and more wage demands.
Fiscal inflation is due to excess government spending, which is evident from the huge budget deficit. This government made a mistake by justifying past budget deficits in terms of its ratio against GDP.
Since the revenues did not grow according to increase in GDP there was no justification of increasing spending much beyond the level of 2018. The expected increase in petroleum rates and the announced increase in power rates would further fuel inflation.