Need for a macroeconomic solution

Prime Minister Shaukat Aziz has warned against hoarding of essential items as a prelude to an increase in the price of essentials. It is unfortunate that wholesalers and retailers of essential items have invariably used the holy month of Ramazan or any national tragedy occurring at any other time to make a quick buck.
Given the recent floods in various parts of the country, scarcity of several items of daily use is being felt in many communities and, therefore, the Prime Minister's warning may well, have been based on an accurate assessment of what is happening in our domestic markets.
However, his two pronged strategy designed to deal with the situation is unlikely to bear fruit even in the short term for the majority of the people of this country.
The first pillar of his strategy is to ensure that all Utility Stores have adequate provisions at a price dictated by the government. In those localities where there are no Utility Stores, including Azad Jammu and Kashmir, the Prime Minister promised to send mobile vans to distribute essential food items at government determined rates.
He is relying on supplying essentials at a lower rate to discourage the poor from buying at the inflated black market prices. It is highly unlikely that the customers covered in terms of their access to Utility Stores and/or the mobile vans would be a significant number.
If this was so then it is obvious the hoarders would be hardly as active for paltry profits as they are in this country. Thus this particular pillar of the Prime Minister's strategy would succeed only if the government is a big enough supplier and can meet a substantial portion of the domestic demand - a condition that can only be met if the government goes full time into the wholesale or retail trade.
Ironically, this scenario is at odds with the present government's focus on privatisation as a means of increasing productivity through greater efficiency of operations. Besides, the government, already struggling with inefficiency in the Utility Stores, may find it difficult to ensure that they are run appropriately and prices are charged according to official dictates.
The Prime Minister did not elaborate on what would determine the prices of these essentials in government stores. If he envisaged a small mark-up, to cover the cost of the mobile vans as well as running the Utility Stores, then the impact of this on the budget for the coming year would be negligible if not zero. However in case an element of subsidy is involved it would impact directly on the budgetary deficit.
An increase in the deficit is always highly inflationary unless accompanied by reduction of expenditures under other heads and/or an increase in revenue, impossibilities both in our case at the present stage.
The second pillar of the strategy to combat inflation, as noted by the Prime Minister, comprised of the Special Committee that he constituted a few weeks ago charged with the responsibility of monitoring the prices of essential items. But whatever policy the Special Committee or the Prime Minister may announce to control a price rise would be only as effective as efficient would be its implementation.
It has been noted time and again that implementation of such price control policies remains poor in this country and there is no evidence that this time around things would be different. Another economic altruism that no one likes to dwell on is that a rise in salaries and pensions during an inflationary spiral fuels prices further.
Hence the Prime Minister's claim that he has provided relief to the government employees and the pensioners, may also require a reassessment if his focus is on controlling prices. What is required is a macroeconomic solution to inflationary pressures. The Prime Minister must turn his attention to his two pet projects whose inflationary impact has been considerable.
First and foremost, the heavy borrowing from bilateral and multilateral sources to fund his infrastructure projects, which, at this stage, is increasing the growth rate, but also flooding the market with money that is chasing too few goods. Second, the credit policy that he seems to be focusing on as a means to end poverty is again flooding the market with money without any commensurate rise in productivity.
Thus a reassessment of the scale of these two projects is necessary before inflation can come down in this country. In addition, he needs to keep a check on the deficit and the State Bank must also ensure that it keeps money supply in check in an effort to combat inflation.
These are the more usual and indeed more effective ways to combat inflation in contrast to threats against hoarding - a rather difficult task at the best of times but made infinitely more difficult by corruption, nepotism and inefficiency in our society and within the ranks of the implementers.