Govt urged better monetary policy to control deflation

LAHORE: The government needs to increase development spending and introduce better monetary policy in order to bring deflation to a suitable level, economists said on Thursday.
The Consumer Price Index (CPI) had been falling for the last seven months, but it dipped to 1.7 percent in July and August triggering fears of deflation.
The deflation is not necessarily bad for the country, but prolonged periods can lead to economic stagnation and high unemployment.
“The planners should take a calculated risk to bring the inflation to a reasonable level through monetary policy and increased development spending,” the economists said, these two measures could be withdrawn if the inflation increases beyond comfortable threshold.
An economist Asif Ali Shahid said the growth has not slowed down. The consumer spending has not been affected, which is evident from the sales of higher number of cars, bikes, TV sets, air conditioners and other home appliances.
The tax revenue has also increased substantially, though a little below target in first two months of this fiscal, he said, adding that these are not enough signs to worry about deflation, “but the government should still take remedial measures.”
He said the recent decline in the rupee value would create some inflationary pressures once imports made at lower rupee value are consumed. Therefore, the central bank would have to factor-in the impact of rupee depreciation on inflation before taking a decision to further lower policy rates.
“Pakistan has lost many years of growth due to bad policies and its economy cannot afford any contraction that the deflation actually causes,” he said.
Another economist Faisal Qamar said the lower inflation in Pakistan is mainly due to falling crude oil price and commodity rates in the global market. “Except the lowering of petroleum products’ prices the government has done nothing to tame the inflation to current level,” he added.
The power rates have not been adjusted according to decline in fuel prices and the gas rates have been increased. These two factors have helped to maintain the inflation at current level. “Had the power tariff been reduced, we might have gone into actual deflation by now,” Qamar added.
“The dilemma for the planners is that they cannot control the external factors,” he said, “If they take some inflationary measures now and the commodity rates rebound in a year, we may immediately face hyper inflation.”
However, he agreed that the current situation is suitable to push the economy by lowering interest rates on long term bank loans specifically for up-gradation of technology.
“The current interest rates are not attractive for the businessmen who have retired under more loan in the last quarter than they borrowed,” he said, “The right kind of deflation involves lower prices through increased productivity and better technology.”
Financial analyst Muhammad Mubashar Bashir said the current challenge that looms large is not inflation but possible deflation. “We are closer to deflation territory and far away from inflation territory,” he asserted.
For the time being it would be better to focus more on controlling the deflationary pressure instead of worrying about high inflation. “The Pakistani economy needs a push, as it is not growing anywhere close to its full potential,” he added.
Bashir said without accelerating manufacturing activities, the country would not be able to address the problem of rising inflation.”
Currently, the industries are creating fewer jobs than the number of workers joining the workforce annually.
He said consistent increase in wages has also decreased the absorption capacity of industries as they cannot afford to pay higher wages for the same level of production. To overcome this wage debacle, industries are opting innovative technologies to compensate higher wages.
However, they need a lucrative financial package to upgrade their industries.
Bashir warned that if the government continued to remain aloof, “we may witness prolonged periods of deflation that would lead to further decrease in economic growth.”