How inflation hurts small retailers

The cost of doing business has risen disproportionately for small retailers and businesses

How inflation hurts small retailers


enerally, inflation has both positive and negative impacts on small businesses and retailers. But given the state of the economy in Pakistan and the way it has devastated small enterprises, inflation is hurting them in new ways.

Devaluation of the rupee is one among several causes of inflation. This has raised the cost of many inputs to the small businesses. All small businesses relying on imported raw materials have seen their costs rising by up to 100 percent due to the massive devaluation of the rupee in recent months.

There are more than 5 million small and micro enterprises in Pakistan. Most of these are perennially starved of cash. Usually, they lack assets and do not get bank loans. These enterprises rely on informal credit that they obtain from family members and friends against the promise of a share in profits. In many cases, these enterprises seek loans from loan sharks at much higher than the bank markup. When the chips are down, the creditors rush to collect their money. This puts small businesses under more pressure.

According to the Small and Medium Enterprises Development Authority (SMEDA) around 2 million micro small enterprises went broke during the Covid-19 crisis and the deep recession afterwards. The main reason was that they could not dispose of their products due to the higher cost. The inflation-hit consumers were not in a position to buy their products.

Most of the small enterprises are family-owned entities that engage two to four family members. They survive in normal times because the family members mostly work for free and usually toil 12 hours a day. In testing times, the sales slow down. Small retailers are unable then to generate enough sales to make business viable.

Generally, the depression does not last long. Once growth picks up, the small businesses are revived. This time around, the depression has lingered unusually longer. The inflation is rising and the rupee is constantly under pressure.

Small businesses face two major issues. The first is the declining sales and the inability to raise the rates to a level that will enable them to buy goods (both retail items and the inputs for manufacture). The result is that their inventories dwindle. They spend more than what they earn. If the process persists, they are forced to wind up the businesses.

When small businesses cannot raise the prices to keep up with inflation, their profit margins get squeezed. Persistent inflation causes uncertainty about the future. This can discourage small businesses from investing in new products, services and equipment.

Small retailers face higher costs as manufacturers raise prices of goods and services. This can affect the cost of buying inventory. When retailers cannot raise the prices of their products, inflation squeezes their profit margins. The retailers find it difficult then to pass on the higher costs to the consumers.

In high inflation periods, the consumer behaviour changes. It impacts consumers’ purchasing power. They usually decrease spending on luxury and non-essential items. This can affect the sales of retailers in those sectors.

How inflation hurts small retailers

There are more than five million small and micro enterprises in Pakistan. These enterprises are perennially starved of cash. Usually they also lack assets and do not get bank loans. These enterprises rely on informal credit, which they obtain from family members and friends.

Inflation in the current global economic scenario has led to supply chain disruptions as manufacturers are finding it difficult to source raw materials and other inputs at reasonable prices. This has caused delays in the delivery of goods and services to retailers.

A Pakistan-specific aspect of the problem has been the curb on opening of letters of credit imposed by the government through the central bank. Almost all small and numerous medium-sized industries face acute shortage of imported components and have been forced to cut down production or completely close down. In the meantime, spiralling inflation has raised the costs to unbearable levels. It’s not the small enterprises that have been devastated, even large car producers have been forced to close factories for at least two weeks a month.

Small retailers and businesses have also been impacted by the general increase in the cost of doing business. The power rates have gone through the roof, gas tariff has almost doubled, the rates of locally available raw materials have increased in line with the domestic inflation that in recent weeks has crossed 40 percent.

Increases in government taxes and levies have further compounded the worries of small businesses. It is worth noting that there has been large-scale closure of small businesses but the corporate results even in the most depressing year of our economic history are adequately positive.

The inability to control inflation has forced the planners to raise interest rates to reduce money supply but the dilemma is that higher interest rates do not suit businesses that are already operating under stress.

The planners face a dilemma. The standard recipe to arrest inflation is to raise interest rates; just as economists prescribe lowering of interest rates in economic downturn. Pakistan is facing both high inflation and economic recession. The inflation has stubbornly remained in double digits for four years. It has now crossed the 40 percent mark.

Unemployment is also at a historic high level and increasing. There has been no net job growth in the private sector over the last four years. Real estate that until recently was the only avenue for investment is also facing stagnation.

The current situation is because of special-interest pressure, populist politics and bad economics. Market failures come only in macro doses in the form of the recessions and depressions that have periodically plagued capitalist economies. These doses cause a number of inefficiencies in the systems that are difficult to assess.

New populist rhetoric of persuading taxpayers that ordinary people always know how to spend money better than the government does and promising a new world without budget constraints has added to our economic woes. Special interests have been the beneficiaries of numerous subsidies on the strength of such populism.

When inflation rises, defaults on loans provided by loan sharks inevitably result in the transfer of assets. Most of the microfinance institutions operating on funds gathered on market rate mark-up from commercial banks are now vulnerable as they provided poverty stricken clients micro loans at substantial premium.

In normal circumstances, 99 percent of the poor service the loans. The poor operate small businesses using these loans. Now that the market conditions have changed drastically, small businesses are losing sales and assets. The small investments used to supplement their regular income as farmers or labourers are gone.

The writer is a senior economic reporter at The News International

How inflation hurts small retailers