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A great social and political upheaval is coming?

There are two extremely discomforting economic phenomena unfolding simultaneously in Pakistan – one is dangerously high food inflation, and the other is rising unemployment. The term economists use for such a trend is stagflation. And this could have severe social implications in terms of rise in poverty, fall in real incomes, and possible increase in violence. Social unrest is very much on the cards.

There is no pause in food inflation – which stood at 45 percent in rural and 39 percent in urban areas during January 2023. The 12-month moving average of national food inflation is at 27 percent last month, up from 12 percent just eight months ago. The quantum jump in food prices is dangerous, and happening at a time when unemployment is also growing.

According to this writer’s sources, the payroll number of a major bank – which handles one-third of the country’s formal sector payrolls – salary disbursement has declined by 140,000 employees from a total of around 3 million employees for which the bank used to handle salary disbursement back in 2022. This indicates 4.7 percent of formal sector personnel have possibly lost employment over the last year. Extrapolating the numbers, around 500,000 people have lost their job in 2022 in the formal sector.

This does not include those who lost employment in the informal sector or were contractual employees of formal businesses. Usually, the first axe falls on contractual employees. It’s easier to get rid of them as these do not have direct obligations to the employer.

Within the textile sector, as per a major value-added exporter, only one-third of workers are directly employed by any textile firm while two-thirds are employed through third-party contractors. They estimate that the job losses in Karachi textile industry alone could stand at 70,000-100,000 which is 20-25 percent of total work force, including both direct and contractual employees.

The number in Punjab is much bigger – both in terms of market size and those who are unemployed. The number of estimated job loss in Punjab’s textile is around 300,000-400,000 and overall textile sector unemployment is approaching a staggering 500,000 number. And APTMA (mainly concentrated in low value-added textile) expects another half a million job losses in the coming months due to upward revision in the energy tariffs for the exporting industries in Punjab. The situation in other sectors is not encouraging either. As per the calculations of auto parts manufacturer association, around 50,000 direct job losses are estimated by the SMEs operating in the segment. There are around 350 automobile parts manufacturers and on average 150 employees lost jobs in each company.

Automobile and other engineering sectors were the first ones to take the hit, as imports restriction were imposed since June 2022. Since then, LCs (letters of credit) restrictions have only expanded to other sectors. Today, SBP (State Bank of Pakistan) is allowing imports of only petroleum, wheat, cotton, pharma and defence-related items. There are no new imports for other industries such as steel, plastics, and even packaging materials. Time is not far when these industries start laying off employees in large numbers. And many SME importers and traders would be out of the business, going forward. This is a scary trend.

That is the stock of the situation in the job market. And there is a significant dent in consumption due to job losses and overall falling real incomes. Petroleum sales are down substantially in this fiscal year so far– 15 percent down in petrol and 23 percent dip in diesel. Moreover, power generation is down by 8 percent. Domestic cement sales are down by 17 percent, as well. Numbers are even worse in the automobile and engineering sector.

The question is, despite the fall in demand, why has there been no respite in food inflation which is rising out of control. There is an inverse relationship between unemployment and inflation. Economists and analysts are perplexed by big jumps in the food inflation.

According to BR (Business Recorder) Research, close examination of inflation data shows that compared to past, mitigating factors within the CPI (consumer price index) food basket have disappeared, pushing the headline food index higher. For example, in the past higher inflation in other food items was compensated seasonally by lower inflation – or even a fall – in prices of high weight commodities such as sugar, poultry products such as meat and farm eggs, and perishable vegetables and fruits such as onion, tomato, potato, among others. Over the past few months, prices of most of these commodities have refused to relent, even seasonally.

One explanation for high rate of food inflation could be that momentum has been building in many high weight commodities for many months now. For example, wheat prices have been on the rise for over the past three years as demand has outstripped supply. Similarly, fresh milk receives a boost each time there is a fuel price increase, due to high share of transportation in the final cost to retailer. Poultry is affected due to the soybean import fiasco. Mutton and beef prices are usually higher than national inflation and that trend is keeping up.

There might be other reasons as well such as smuggling of food items to Afghanistan and central Asian countries. This is evident by volumetric growth in import of pulses and edible oil despite increase in the prices at a time of falling demand and shortage of dollars.

Ever since the US left Afghanistan, it appears that the food demand of that country has increasingly shifted to goods being smuggled from Pakistan.

And this could be the case in relation to several non-perishable food items, especially wheat.

Whatever the reasons are, the fact of the matter is that the food inflation trend in the current year is exceptional, at a time of substantial rise in unemployment. The trend is likely to get worse with a possible increase in interest rates and continued import restrictions. There is nothing more urgent and pressing in this country than to address the growing stagflation trends. However, it seems that the priorities of authorities are focused on stifling the popularity of political opponents. The elephant in the room is not the opposition, but stagflation. Get the priorities straight.

Ali Khizar, "A great social and political upheaval is coming?," Business recorder. 2023-02-20.
Keywords: Social sciences , Social issues , Food inflation , Real incomes , Social unrest , Political opponents , Oil prices , Textile sector , Unemployment , Poverty

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