A conversation with economist Dr Kaiser Bengali on rampant inflation in the country and its likely causes
A conversation with economist Dr Kaiser Bengali on rampant inflation in the country, its likely causes, explanations by the government and likely future developments. Excerpts:
The News on Sunday (TNS): The government claims that people’s incomes have increased and prices of petroleum products are the cheapest in the region. How do you see this?
Kaiser Bengali (KB): This is simply ridiculous. Purchasing power of people has decreased drastically. How can one say that they have become affluent? Prices of basic commodities and necessities are getting out of control, what to talk about comforts. Secondly, when they say oil prices are the lowest in the region, or the world, they do not compare the incomes of people in developed countries [with those of our people]. It may happen that the income of a person has increased by 20 percent here and prices of commodities by 100 percent. Hence this argument does not hold ground.
TNS: What are the causes of this runaway inflation?
KB: There are two types of inflation: supply driven and demand driven. In supply based inflation the cost of production increases. For example, if we import expensive oil it will have an impact on everything. For example, the cost of transportation will increase and shopkeepers will be compelled to sell their commodities at higher prices. The factories will buy more expensive furnace oil and the sales price of goods produced there will increase. In demand-based inflation, money circulates on a large scale, causes inflation and puts pressure on prices. Prices spiral upwards as demand increases but supply is unable to meet it. One thing that the government can do is decrease taxes, but it wouldn’t do so because doing so will reduce their revenues. Imported goods are already expensive and taxes are one reason for that. Another option to reduce demand-based inflation is for the government to reduce its non-development expenses, e.g. salaries of civilian administration and armed forces. This will reduce the amount of money circulating in the market and take care of demand-based inflation.
TNS: Pakistan’s trade deficit with several countries has increased. Why is it so and how does it impact prices?
KB: How can the trade deficit decline when we produce a limited number of exportable items and often the prices are non-competitive in the international market? Our exports are hovering around $23 billion to $24 billion for some time now, whereas imports are much higher in value and increasing by the day. Even in the case of agriculture, we are importing commodities like sugar, cotton and wheat which we would export in the past. This definitely has a negative impact and the currency loses value. The main reasons for decrease in agricultural produce are that we do not have a basic agricultural sector, and agricultural policies have done little good to the sector. A trade deficit reduces the value of currency and prices of goods move upwards as there are lots of imported goods involved in their manufacturing.
Like agriculture, industry is also suffering and I know people who have sold off their factories and pumped their money into real estate and the stock market. These sectors are non-developing as they do not create jobs and one can make profits merely on speculation. High taxes are also a reason for industrialists to switch fields. The rate of tax on imported paper is higher than 50 percent.
TNS: Does the IMF (International Monetary Fund) agreement have something to do with this inflation?
KB: Yes. It definitely does. Pressure from the IMF mounts when you do not have dollars to pay back international loans and you approach it for a bail out. The IMF says it will give you dollars but this will be conditional and the country will have to meet certain conditions like removal of subsidies, increase in prices of electricity, increasing taxes etc. Here the prices of electricity, gas, train fares are increasing. All of this is the impact of the IMF agreement. The agreement was temporarily suspended due to Covid-19 but now it is very much in force.
TNS: Dollar price is sky-rocketing and the State Bank of Pakistan (SBP) says it has left determination of exchange rate to market forces. Is that so?
KB: No, this is not the case. The central bank is still intervening and selling dollars in the market to increase supply which keeps a check on the exchange rate. If it pulls out today the exchange rate will jump to Rs 180 against the US dollar. The SBP claims that it is not intervening but it is.
TNS: It has been alleged that the smuggling of Pakistani products out of the country is creating a shortage here, leading to higher prices. Is that true?
KB: Commodities have been smuggled to Afghanistan for a long time and this definitely creates a shortage here. The border between the two countries is practically open. I will give you one example. Every year three million tonnes to four million tonnes of wheat is smuggled to Afghanistan from Pakistan. Same is the case with many other commodities as well. When I was working with the government in 2008, I put the consumption target at 26 million tonnes whereas other officials had given the figure of 23 million tonnes. I told them that I had added the three million tonnes that would be smuggled out to Afghanistan. Afghanistan also exports a large number of products that it does not use but smuggles to Pakistan. This affects local manufacturers whose production does not remain viable.
The interviewer is a staff reporter and can be reached at [email protected]