Authorities advised to contain inflation

LAHORE: The economic managers need to stop facilitating a few segments of the economy and concentrate on containing inflation.

Instead of announcing packages and amnesty schemes the government should go for tax evaders and measures to increase the tax base for the betterment of the economy in the long run.

Inflation would be the last thing that any government would want in an election year. The Musharaf regime was toppled because of inflation and higher food prices in 2008. The Pakistan Peoples’ Party government lost the election because of higher inflation and higher food prices in 2013.

This government has been able to control inflation for most of its tenure. It would require a lot of expertise and economic acumen to contain the inflationary pressures that have been unleashed recently.

Inflation remained under five percent during the last 54 months. It helped the government achieve macroeconomic stability. Rupee remained stable during the period, while low crude oil rates enabled the state to lower petroleum rates as well.

For the past two years, interest rates too have been hovering at the lowest level. When the International Monetary Fund (IMF) programme was operative, foreign exchange reserves too remained in the comfortable zone.

This macroeconomic stability facilitated the present regime in keeping gross domestic product (GDP) growth constant. It managed to operate the economy at low inflation despite huge fiscal deficit of over one trillion rupees. Lately, however the global scenario has changed. The oil prices have gone up much beyond the expectations and the global commodity rates are also rising.

At the domestic front, the foreign exchange reserves are under threat though their complete collapse was averted by issuing $2 billion Pakistan bonds. The decline in exports has remained constant during the first four years of the current Pakistan Muslim League-Nawaz regime though there has been an upward trend in the last six months. At the same time imports have increased at a rapid pace and are currently 2.5 times higher than the exports. Rupee that remained stable for almost four years is now under extreme pressure and has already lost its value by five percent in the last 45 days.

Even after that the pressure on the rupee has not eased. Remittances, which in the past one decade shielded foreign reserves, are not going up and are insufficient to cover the huge import-export gap.

The emerging scenario points towards inflationary pressures. Higher oil rates mean higher foreign exchange needed for crude oil import. This would pressure the foreign exchange reserves more. The rupee will come under more pressure and the rupee-dollar parity would have to be readjusted.

This huge budget deficit now would increase inflation. Lower rupee value would mean that the imports would be expensive by 10 percent (that includes the impact of devaluation and the taxes to be paid on this increased value).

Higher global petroleum prices would mean higher rates of petroleum products. The pressure on higher rates of petroleum products has been compounded by the devaluation of rupee as well.

This would result in higher passenger fares and higher transport fares. It will have a cyclic impact on the prices of all items, which will put further pressure on inflation. The government has got few options to come out of this dilemma. It has to control inflation in the election year.

It cannot afford to announce packages for the influential segments of society. Any package it announces would adversely impact the development budget. It has already committed a folly by announcing Rs180 billion package for five exporting sector.

The results up till now indicate that the export increase as a result of this package is lower than the amount the government is giving to them. On the other hand the sectors that have been left out of this package have shown robust growth that is more than two times the export growth of the sectors receiving the assistance.

If the government ruthlessly pursues tax evaders even at the risk of losing popularity, it will be good for the economy. If not, then the interim government with no stakes in the election would take necessary corrective measures. The impact of these measures would fall on the current regime.