EDITORIAL: There is no respite on the inflation front. The headline number at 13 percent in January 2022 is the highest number since January 2020 in which inflation was recorded at 14.6 percent. The PTI government is losing its popularity due to soaring inflation. Despite Prime Minister’s utmost focus on reducing it, the government has so far failed to tame it.
That the PTI government did not inherit a healthy economy is a fact. In the early days of the PTI’s tenure, the macroeconomic adjustment in terms of massive currency adjustment and other fiscal and monetary tightening policies brought higher inflation and high interest rates.
Things were supposed to calm down and stabilization was expected to be over in two years. But, within a year of stabilization policies in vogue, the Covid pandemic struck. This was a massive curveball for the entire world. The whole equation changed; interest rates came down and other fiscal stimuli were rolled out in conformity with global norms in tackling the pandemic-related economic setbacks.
Inflation abated for a while due to the fall in global commodity prices that resulted in the current account registering a surplus. The government, however, mistakenly declared that the economy was now poised to transition from stabilization to growth mode. The finance minister was changed. The IMF (International Monetary Fund) option was held in abeyance.
The premise was to achieve growth in view of the bonanza of low commodity prices and reasonably tamed current account. However, that was not to be. The notion that stabilization had been achieved melted in no time.
The external account began to feel the pressure as the global prices of almost all the commodities began to peak simultaneously unlike the norm as many commodities have their own cycles and do not move in tandem.
The reason for this unusual movement though was due to Covid-19 lockdowns. In 2020, production levels fell and when the demand rebounded in 2021, the stock levels had started to deplete while lockdowns had already reduced production flows in 2020.
That resulted in almost all the commodity prices peaking at the same time with severe inflationary consequences for a country like Pakistan that relies heavily on imports. In addition to rising inflation, the current account began to slip again, seriously challenging the nascent economic recovery and stabilization. Thus, brakes had to be applied to lower the economic growth momentum.
The interest rates are on the rise again. The currency is adjusted by 15 percent from its peak. The oil prices have moved up to their 2014 levels. That all is bringing inflation home and the growth momentum is slowing down again.
The recently released figures of imports and tax collection for January are suggesting that growth is losing momentum, and the stabilization phase is back in action. Seeing this trend, the SBP (State Bank of Pakistan) probably got cold feet and indicated an end to the tightening cycle as growth is probably coming down at a faster pace than what the central bank was expecting. In this backdrop, 24 months high inflation is pinching.
The headline number is likely to remain in double digits for the rest of the fiscal year. The PM has deferred the passing of oil price increase onto the consumers due to the menacingly high inflation. This is a fight in which the government is ill equipped to prevail as international prices are not within its control or domain.
The situation remains fluid for inflation and external account till commodity prices revert to the mean that some pundits expect would happen in the second half of this calendar year.
Meanwhile, the State Bank of Pakistan has imposed restrictions on purchase of foreign currency from the open market and set limits on remittances from the personal foreign currency accounts (now all exchange companies are required to ensure that no individual shall buy foreign exchange of more than $10,000 per day and $100,000 per calendar year or equivalent in other currencies in the form of cash or outward remittances).
These steps are clearly aimed at stemming the conversion of rupees in foreign currencies and their exodus from the country. To help in this effort the government has energized the Federal Board of Revenue (FBR) and launched the automated currency declaration scheme for all incoming and outgoing passengers.
Conclusion: inflation is the rate of increase in prices over a given period of time. It is a fact that inflation has plunged countries into long periods of instability.
The PTI government, in this newspaper’s view, ought to be increasingly mindful that people have started turning away from it because of rising inflation. According to the IMF, for example, “politicians have won elections with promises to combat inflation, only to lose power after failing to do so”.
Copyright Business Recorder, 2022
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