Curbing Inflation

October 10, 2021

— Dr Akmal Hussain - discusses structural factors responsible for the rising inflation and methods to shield citizens from its consequences

Photo by Rahat Dar.
Photo by Rahat Dar.

In Pakistan, inflation is not caused primarily by money supply. Had it been so, the State Bank’s policy of tightening the money supply through higher interest rates should have brought the inflation down. Instead, prices continue to rise. In my view, inflation in Pakistan, like in many Third World countries, is caused by structural factors. There are four such triggers:

1. Exchange Rate depreciation. When the value of a US dollar, in terms of Pakistani rupees, increases, the rupee prices of all imported goods rise. Moreover, as the rupee prices of imported inputs of locally manufactured goods increase, the prices of these goods also increase. Consequently, exchange rate devaluation has an across the board inflationary effect.

2. The price of imported oil. As fuel prices rise, the cost of production of all goods and services in which oil is an input goes up. Oil prices increase when the government increases surcharges in an attempt to generate revenues, as has happened in the latest surge in fuel prices.

3. The price of wheat flour (atta). Anyone selling any commodities or services, when faced with increased price in this, the most basic item of consumption, will increase the prices of the goods they sell.

4. The price of electricity. When electricity prices increase, this increases the cost per unit and hence the sales price of the goods and services that use electricity in the production process.

The present government, in line with the IMF framework of thinking, has tried to reduce expenditures and increase revenues in an attempt to control the budget deficit. In doing so, each of the four structural factors mentioned above has been triggered, resulting in accelerating inflation, particularly food inflation. The government has sought financial relief for itself by bringing misery upon most people.

We have now reached a situation where the teeming millions are in a desperate economic plight. The urgently needed succour can be provided by declaring food a fundamental human right. The first step in this direction is to issue food stamps to the bottom 45 per cent of the people. On the basis of these food stamps, each poor household, depending on family size, should get, free of charge, basic food rations such as wheat flour, cooking oil, lentils and gas/kerosene for operating kitchen stoves.

The writer is a Professor and Dean at the School of Humanities and Social Sciences, Information Technology University, Lahore.

Curbing Inflation