Cost of living doubles

A random survey carried out by a section of the Press has brought a rather disturbing statistic to the forefront: the doubling of the cost of living. The survey noted the rise in prices of key consumer items and used that as a yardstick to reach this conclusion. Three factors need to be noted before one can endorse this assessment.
First the survey does not take note of an across-the-board rise in incomes. The sub-sector that witnessed the highest income rise in the past five years was funded from our tax rupees, namely government servants - civil and military - were awarded a 50 percent rise in their income one year followed by 15 percent in each of the two subsequent years; it is also relevant to note that even though the federal and Punjab governments did announce a substantial increase in the minimum wage its implementation remains sketchy at best. In addition, even though the private sector pay scales have risen over the past five years, yet, due to a sustained loss in economic activity due to massive loadshedding and strike calls almost throughout the country but particularly in Karachi, the financial hub of the country, lower productivity has translated into a salary rise in most cases that was not commensurate to the rate of inflation with an obvious negative impact on the cost of living.
And finally, the federal government has resorted to sustained unbudgeted heavy borrowing from the domestic financial sector due to its failure to access funds from external sources that is attributable to (i) failure to implement the reforms agreed with the international donor agencies with respect to tax and power sector; and (ii) the International Monetary Fund's refusal to extend a Letter of Comfort that was stipulated as a condition by multilateral and bilateral donors to extending budgetary support. In short, the government expenditure through borrowing has risen dramatically and its revenue remains extremely limited with failure to either generate the budgeted tax revenue or the budgeted non-tax revenue (due to its inability to either auction 3G licence or compel Etisalat to pay the remaining 800 million dollars in spite of the government's failure to mutate the attached properties to the company as per the agreement). Thus there is too much money in the economy due to high government expenditure made possible through borrowing which is chasing too few goods that are being produced by the economy. The result is inflation.
There is ample evidence which indicates that utility rates have increased manifold even though the supply of some utilities, notably electricity and gas, has declined massively. In addition, transport costs continue to rise by an amount greater than the rise in the international price of fuel because the government taxes this sector to generate over 200 billion rupees per annum (120 billion rupees budgeted under the petroleum levy alone). The reason: this is the easiest tax to collect and does not require any proactive effort on the part of the Federal Board of Revenue.
The then Finance Minister, Dr Hafeez Sheikh, maintained that inflation was declining and cited the almost halving of the rate during the past five years as proof of his contention. However, what he did not dwell on was the fact that the Federal Bureau of Statistics made some changes in the weight given to various sectors with the weight given to the food sector, that had till then been the lead item responsible for the high rate of inflation, reduced by more than 5 percentage points. This change in weightage without a long-term survey reflects mala fide intent on the part of FBS which comes under the Ministry of Finance.
The problem of doubling of the cost of living is not insurmountable and there are a set of policies that can resolve the issue notably eliminating borrowing from the domestic market (which would no longer crowd out private sector borrowing), reducing government expenditure drastically to curtail the budget deficit to under 4 percent and increasing private sector activity through power sector reforms and resolving law and order issues. Unfortunately, however, political will to reform appears to be clearly lacking with the focus on the impending elections.