Inflation challenge

The unabated, uncontrolled, unchecked and ever-rising inflation is making life of the common people miserable with every passing day. It should be cause for concern for those at the helm of affairs but they even do not know even the real causes behind it what to speak of controlling it. In fact, their policies are pushing Pakistan towards hyperinflation. Inflation for people earning merely Rs 100 per day has gone beyond 55 percent, the highest in past 40 years. According to figures released by Federal Bureau of Statistics (FBS), Sensitive Price Index (SPI)-based weekly inflation surged sharply (11 percent) during the week ending on October 10, 2013 over the corresponding period of the previous year.

This big jump in the weekly inflation was caused by major increase in prices of kitchen items overburdening the already poverty-stricken segments of our society. The households in the two lower income brackets of up to Rs 8,000 and Rs 8001 to Rs 12,000 felt the greatest pinch of this weekly inflation as it soared by 33.93 and 32.69 percent, respectively. SPI increased by 32.05 percent for the households in the income group of Rs 8,001 to Rs 12,000 and was up by 31.42 percent for more than Rs 12,000 income group. Many economists have expressed concern over this situation as they fear that due to poor food security, inflation would keep on rising. They are of the view that low-income groups are badly affected due to continuous increase in prices of essential food items together with recent hikes in petroleum products and electricity tariffs would further aggravate the situation for them – immediate impact can be seen in the cost of transportation both for domestic and commercial use.

The FBS’s report reveals that out of 53 items, prices of 47 essential items increased during the last few months substantially as compared to the previous year. The increase is as much as 128 percent in some cases. Traditionally, pulses, rice, and roti are considered essential components of a poor man’s meal. The FBS statistics showed that average price of all pulses surged by over 70 percent. The average quality wheat also became costlier by 22 percent. Rates of rice basmati and irri-6 rice also increased above 30 percent. Low-income groups are now facing starvation – a situation that was unthinkable some time back. Government servants complain that increase in their salaries, announced in the federal budget 2013-14, is not enough to meet daily needs at a time when the rate of household commodities is increasing on hourly basis.

Pakistan at the moment is grappling with the worst inflationary pressure of its 67 years of existence. Official statistics admit that consumer price index has increased forty-five fold during the period 1949-50 to 2012-13. Food inflation is on the rise since the last three decades. The core inflation (non-energy and non-food) escalated to 13 percent in June 2013 as compared with the modest figure of 5.7 percent in the same month in 2012. Official figures admit that inflation during July 2013 jumped to 8.3 percent from 5.9 percent in June 13 – this immense jump was a signal to further price hike in the months to come, and by October 15, 2014 it was proved that inflationary trend would continue upward for the rest of the fiscal year.

It is widely believed that in official statistics different methods are used to suppress the actual rate of inflation in Pakistan. Dr Muhammad Yaqub, the former Governor of State Bank of Pakistan, in his column ‘Controlling inflation’ [The News, July 17, 2013] observes that: “The government should work on a correct and consistent method of constructing price indices with commodity weights that are representative of the budget of an average household and prices that reflect what people pay in actual practice. The use of unrepresentative commodity weights, tampering with the base year and using more favourable prices in constructing the indices in order to fool the people ultimately hurts the government’s credibility and backfires on it”.

Dr Yaqub has rightly pointed out that “inflationary expectations give birth to hoarding and black marketing of goods as a means to reap large profits which should indeed be tackled through punitive government action”. It happens every year during Ramazan and festivals like Eids that artificial inflation is created by unscrupulous elements. There also exist strong cartels – for example fertiliser, sugar and cement manufacturers – that are behind this phenomenon. Since these industries and many others are owned by the ruling elite they effectively counter any legal action – the Competition Commission of Pakistan (CCP) is totally helpless before them. It has failed to take any action against these cartel and many multinationals that are fleecing our poor farmers by supplying costly and substandard pesticides, insecticides and other inputs. They fix the higher prices by collusive arrangements without any fear or retribution.

Black market practices, cartelization and hoarding flourish in environment of inflationary expectations, but are not the fundamental causes of malady. There may be temporary hike in prices in the wake of short supplies due to natural calamities such as floods and earthquakes, bad weather and cyclones. Shortage of a commodity due to any reason giving rise to higher price cannot be equated with sustained inflation that has its roots in what Dr Yaqub has explained as “expansionary and irresponsible fiscal policy and/or a highly accommodative and inappropriate monetary policy”.

The most important point highlighted by Dr Yaqub and many others is restructuring of the taxation system to reduce dependence on indirect taxes that would reinforce the positive effect of reduction in the gap between the growth in the GDP and growth in money supply. We have raised this point in a number of articles such as Budget 2013-14: We missed everything again, Business Recorder, June 21, 2013 and Punctured tax base, Business Recorder, February 22, 2013. All said and done, it is very aptly concluded by Dr Yaqub that “without restructuring fiscal and monetary policies, and ensuring a reasonable balance between aggregate supply and demand, the genie of inflation cannot be put back in the bottle by administrative measures”.

We must not forget that rising inflation – the SPI surges – are directly related to rise in poverty. According to Centre for Research on Poverty and Income Distribution (CRPID), there are 63 percent of poor in Pakistan in the category of ‘transitory poor’. The State Bank of Pakistan (SBP) also admitted this fact saying in its annual reports that the standard definition of ‘transitory poor’ includes those households that are below the poverty line for most of the time but not always during a defined period. The rest of 32 percent and 5 percent of the population that subsist below the poverty line have been found to be ‘chronic’ and ‘extremely poor’, respectively. Chronic and extremely poor are households that are always below the poverty line, all the time during a defined period. Similarly, on the other side, 13 percent and 21 percent of total non-poor (above the poverty line) were classified as ‘transitory vulnerable’ and ‘transitory non-poor’, respectively.

Inflation is mother of many economic ills – it results in inefficient resource allocation and hence reduces potential economic growth. Inflation imposes high cost on economies and societies; disproportionately hurts the poor and fixed income groups and creates uncertainty throughout the economy undermining macroeconomic stability. High inflation always penalises the poor more than the rich because the poor are less able to protect themselves against the consequences, and less able to hedge against the risks that high inflation poses. Lowering inflation therefore, directly benefits the low and fixed income groups.

Even a tight monetary policy for the last many years has not succeeded in arresting the uptrend of core inflation substantially in Pakistan as higher inflation is also an outcome of exploding population putting extraordinary pressure on the demand side. Pakistan is sixth most populous country in the world with an estimated population of 184.35 million in 2012-2013. The growth rate of population during 2012-2013 was 2 percent. If this trend continues Pakistan will become fifth most populous country in the world in 2050. On the supply side, the pressure emerges from a verity of factors, like increase in support price. Unable to produce the targeted level and mismanagement in supply, yields the increase or upward trends in the prices.

As discussed above, high inflation in Pakistan is the product of a multi-dimensional process. It is also the outcome of two economies, open and underground, working together along with corruption and crime, which makes it difficult for the government or society to check. Above all, we live in a profit-oriented society where the consumer can never prevail over the capitalist or the market. Mullah preaches the traders that “trade is halal no matter whatever is the percentage of profit”. In these circumstances, hoarding, black marketing and profit-mongering are rules of business for our trading community.

If curative measures cited above are not taken, SPI may increase to 45 percent in the coming months. This will push more people towards the category of ‘transitory poor’! This portrays an alarming situation as with rise in SPI more and more people move from transitory category to chronic category, courtesy inequitable distribution of wealth, unjust economic system and regressive tax policies. Rulers in Pakistan have never shown any concern for redistributive economic and social justice as their political goal. One wonders if present government, badly trapped in debt trap and totally directionless regarding tackling the economic issues faced by the country, would be able to take some practical steps to overcome the menace of rising inflation and poverty.

(The writers are Adjunct Faculty at Lahore University of Management Sciences (LUMS) and partners in law firm, Huzaima & Ikram (Taxand Pakistan)