It finally happened. The National Consumer Price Index made a double century in January 2023, indicating that the average price level of consumer goods in the country is now twice its level six and a half years ago. Meanwhile, average income– and that of daily wagers in particular – has risen no more than two-thirds. Pakistanis continue to become poorer every passing day, and the CPI report card describes a horrifying tale. For more, read ‘Purchasing Power erosion during CY22’, published on Jan 02, 2023)
The heavy-weight food CPI rose by 43 percent over last year, as policymakers across the political spectrum fail to acknowledge one basic truth: goods markets with administratively fixed prices cannot co-exist with a free-market-based exchange rate. (For more, read: ‘PTI’s Dar moment’ published on Jan 11, 2022). As a result, the anticipation of currency depreciation keeps fueling a speculative inflationary cycle. And which segment could better reflect the damaging effects of this vicious cycle in a 220+ million strong country than the food value chain, where prices of essentials with inelastic demand take the worst battering.
And don’t let the PDM surrogates tell you these are damaging – yet inevitable – consequences of the monsoon floods. Shamefully, food price inflation has touched a new peak at a time when perishable prices are still on their seasonal winter retreat. Dangerous undercurrents are unfolding in the non-perishable subindex, where grain prices are reaching frightening levels well before the peak demand season. That is Ramzan and Eid ul Fitr.
Those at the helm should be very scared. While the analyst community has offered sufficient advice on managing external imbalances and undertaking macroprudential policies, not nearly enough warning shots are fired on what a hyper-inflationary cycle due to food insecurity could mean for the political stability of the federation. This isn’t fear-mongering. Consider.
Pakistan is entering a structural adjustment period that is expected to usher in a fresh cycle of rationalization in administered prices of energy and transport raising the cost of domestically produced food commodities, along with exchange rate correction that will make imported food commodities significantly more expensive. And this is coming on top of already the worst food inflation levels in nearly fifty years.
It is almost certain that any more exogenous shock to the economy in the near term along the lines of a Ukraine invasion or super monsoon floods will bring the country to its knees, possibly causing social strife. And just last year alone has shown that those are no longer Black Swan events.
That’s not a plea to avoid the pending structural adjustments. Instead, a suggestion is to cut the fat wherever IMF demands whether in energy sector losses, civil service perks, or unfunded subsidies to exporters. And use the resources to build a war chest and dole out unconditional cash transfers while simultaneously expanding the base of BISP and Ehsaas sizably.
Pakistanis need help now, and if statistics are to be believed, the number of those finding it difficult to make ends meet has risen dramatically over the past five years. Rather than sermonizing about raising reserves through the charity of the rich and powerful, it is very much in the federal government’s power to cut down the state’s unproductive expenditure. It must act immediately before it is too late.
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