Balancing the needs of the common man with fiscal responsibility is a complex task. It requires careful planning and execution
he major factors that trigger inflation in Pakistan include the food prices, prices of petroleum product and the exchange rate. While the present regime has moved to stop the depreciation of the rupee, the food and petroleum prices continue to rise.
Food inflation is still high and the global crude oil prices are on the rise. Other factors that trigger inflation are the power and energy rates. Power bills are currently the most talked about expense in household budgets. There are indications that power and energy rates will continue to rise for a while. Gas rates alone are set to jump by 45 percent this month.
What relief does the common man want? More than the food prices the poor are now worried about their power bills. A family with a fan, a fridge and a television consumes around 200 units a month. Three years ago the bill for 200 units was around Rs 3,000. A year and a half ago, the bill for the same number of units rose to around Rs 5,500. Now 200 units cost over Rs 9,000. How much relief can the government provide on this bill, Rs 1,000 or Rs 2,000? Will it solve the family’s problem?
The government is not in a position to provide even this amount. The cost of transport has risen manifold and is bound to rise more as petroleum prices are revised every 15 days. Will the government share the burden of transport expenses? There is no way that this or any other government in Pakistan could help the common man in meeting these expenses. Prices of medicines are now out of reach for the common man. Many people are skipping their daily doses of life-saving drugs to save the resources for other needs.
Pakistan’s economic problems are deep-rooted. There is no quick remedy available with the resource-starved government to provide meaningful relief to the common man. The administrative measures taken by the caretakers to stop speculation and hawala businesses in the money market, have brought down the dollar’s value against the rupee but there is a long way to go. The rupee had depreciated massively against the dollar and even a correction of Rs 30 has not resulted in lowering of prices at the retail level. It is, indeed, a dilemma that when rupee depreciates by small amounts its impact on the prices is manifest immediately. But the market has not discounted the impact of the appreciated rupee. The argument of the businesses is that the impact of appreciation would be on new imports of finished goods and raw materials. This logic does not apply when the rupee depreciates.
This is an administrative problem and can only be resolved if similar administrative actions are taken against businesses as have been taken against hawala dealers and sugar hoarders. The government does not lack manpower to enforce fair regulation. However, it certainly lacks the will to confront so many vested interests in the system. A culture of exploitation is embedded in the system.
Governments should develop and implement comprehensive economic plans that address structural issues contributing to inflation and budget deficits. This needs consistency of policies. If the economic policies continue to change with the change of government, it will create uncertainty and impede economic progress.
Action against power thieves will improve the finances of power distribution companies. But it will not result in an immediate reduction in the power rates. Reduction in losses will reduce the monthly increase in the circular debt but the pressure on power tariff will reduce only when the circular debt is eliminated. Addressing a situation where power rates increase, food prices trigger inflation and currency appreciation is insufficient to offset these effects, leading to a significant increase in inflation and household budget distress, requires a multi-faceted approach.
The central bank is trying to adjust monetary policy to control inflation. If inflation is primarily demand-driven, they can raise interest rates to reduce spending. However, if it’s supply-driven (like rising food prices due to factors like bad weather), monetary policy may have a limited impact. In Pakistan, it is a combination of both. The central bank has gone too far in increasing its policy rate. It is likely to increase it further to tame the runaway inflation.
The policy rates are increased to contain money supply. But this does not happen in Pakistan where the government is the largest borrower. When it borrows heavily to finance its fiscal deficit its debt-servicing liabilities increase correspondingly and that further increases the fiscal deficit. The private sector is starved of bank loans when the government is the major borrower but in the current circumstances the private sector lacks the appetite to borrow at 25 percent markup or even more (22 percent policy rate plus minimum 3 percent premium).
High policy rates increase the cost of doing business and, hence, increase the prices of goods and services. After massive increases in prices even the targeted subsidies doled out by the state are not sufficient for the poor.
Addressing supply-side issues causing food price increases is essential. This can include investments in agricultural infrastructure, improving productivity and bringing down trade barriers. These are long-term remedies. The common man needs immediate relief which is not in sight. Reducing reliance on a single sector, such as petroleum, can make the economy more resilient to external shocks. Diversification can create new economic opportunities and reduce vulnerability. This again is a long-term solution but a beginning must be made to ensure a better life five years from now.
Addressing these challenges requires a long-term perspective. Governments should develop and implement comprehensive economic plans that address structural issues contributing to inflation and budget deficits. This needs consistency of policies. If the economic policies continue to change with every change of government, uncertainty will persist and impede economic progress. We certainly need a charter of economy that provides constitutional protection for economic policies for at least 10 years. We also need economic policies that ensure a level-playing field for all. There are no one-size-fits-all solutions to economic challenges like the ones we are facing in Pakistan. Balancing the needs of the common man with fiscal responsibility is a complex task. It requires careful planning and execution.
The writer is a senior Lahore-based economic reporter at The News International.