Inflation and the public

Inflation, we know every time we go to shop, is on the rise. Just by how much is debatable. All stakeholders whose responsibility it is to keep inflationary pressures in check, namely the federal government and the State Bank of Pakistan (SBP), are at great pains to tell the general public that it is due to their timely actions that the country is not experiencing run away inflation; while the general public continues to witness the value of each rupee it earns shrink almost on a weekly basis.
The federal government and the SBP are, at first glance, following policies targeted to reducing inflation. That there have been many slips in adhering to these policies as far as the federal government is concerned is also acceptable to some extent in the post-flood scenario. However, what appears to be unforgivable from the perspective of the people of this country are the government's ill advised policy measures that are fuelling inflation for the low income at the expense of the rich and the influential.
The federal government claims that inflationary pressures are in check, or in other words are not rising by as much as would otherwise have been evident due directly to its sustained policy to contain the budget deficit. Such a claim defies logic given that the budget deficit has been increasingly kept within the targets agreed with the International Monetary Fund (IMF) through reliance on SBP borrowing, a highly inflationary policy.
This reliance is in violation of the agreement with the IMF that was signed by the government in November 2008, and given SBP reservations on such borrowing is reflective of the federal government's considerable control over the policy decisions of the SBP. At the same time, the government's decision to conform to the IMF conditions that included raising utility prices to ensure full cost recovery and ending subsidies were compromised due to continuing flawed policies. The primary flaw in policy was continuing heavy budgetary support to corrupt and inefficiently-run state-owned enterprises (SOEs), headed by those close to members of the executive.
What has added fuel to the fire are recent instances whereby the Supreme Court, compelled to take suo motu notice of corruption in SOEs, was nonetheless rendered powerless to take appropriate action as the government continues to effectively derail the investigation process. Instances of such actions are rising. The Pakistan Steel Mills suffered a loss of 26 billion rupees in under a year after the PPP appointed its own man at the helm of affairs soon after it came to power; and the National Insurance Company (NIC) overpaid by over 100 percent for real estate procured in Lahore, Karachi and Dubai.
Thus economists both in this country and abroad are raising the obvious question: subsidies to the electricity sector as noted in the budgetary documents were around 200 billion rupees in the revised estimates of 2009-10 (or prior to the ongoing year's rise) while the government envisaged supporting these badly run SOEs to the tune of 300 billion rupees. In other words, the government has its priorities skewed in favour of its 'favourites', who continue to make money at public expense.
Who in government must bear the blame for this flawed policy? The Finance Minister would, no doubt, defend himself by accurately pointing out that he is neither responsible for the appointments in the SOEs nor is he responsible for the failure of the cabinet and the parliament to impose a tax on the elite. Dr Hafeez Sheikh would do well to heed what his immediate predecessor did when he was faced with a similar situation: Shaukat Tarin resigned, though publicly he cited personal reasons for his resignation.
The second major contributor to inflationary pressure for which the government must be held responsible is its failure to strengthen the Competition Commission of Pakistan (CCP), in which, unfortunately, it is supported by the opposition, which has led to artificial shortages. Sugar, cement, wheat prices are set through collusion and an ineffectual CCP continues to flounder in its inability to take appropriate action. The two currently responsible for policies at the macro and micro level, the Finance Minister and the Deputy Chairman of Planning Commission have both worked for international donor agencies that parrot the mantra of allowing the market/full cost recovery to set price.
Sugar, as is well known, was deregulated on the advice of the Deputy Chairman with the objective of allowing the market to set the price as in other countries. But what happened is there for all to see: an anomalous tax system that allowed sugar import tariffs to be lower than the GST on domestic sugar, which explains why domestic sugar is so much more expensive than the imports, coupled with allegations of collusion of sugar mill owners as well as allowing the Utility Stores to charge a price less than half in the open market and one understands why international experts must also have local knowledge to make a difference. In addition, smuggling continues across our eastern and western borders.
The government has also resisted attempts to tax the rich and the proposed tax measures to deal with the post-flood rehabilitation efforts envisage taxing the already taxed. And finally wage push inflation is evident that is led by the economically unsound decision of the Prime Minister to raise salaries of bureaucrats by 50 percent.
The State Bank of Pakistan (SBP), considered a major player in reducing inflationary pressures, may well maintain that it has controlled inflation through a tight monetary policy third year running. The International Monetary Fund (IMF) may well claim that policies designed to contain the deficit as well as a tight monetary policy are an outcome of their negotiations with the Pakistani team. But the general public has its own yardstick to evaluate the rate of inflation from one month to the next: the basket of goods that can be purchased with each rupee earned.
To conclude, the Federal Finance Ministry as well as the Planning Commission need to be headed by a political heavyweight. To hire technocrats for the job makes no sense, especially as the government can hire these technocrats as advisors if it feels that the two entities do not have qualified staff to come up with economically sound prescriptions that include being cognisant of local factors - a factor that is simply not credible.