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The Nuisance of Inflation

Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori

The gulf between the income of a common man and prices of necessities of life is broader than ever before and resultantly his struggle to make ends meet is becoming more and more cumbersome. Constant rise in the rate of inflation has eroded the purchasing power of people. However, despite all the hardships faced by the general public, the government and its administration seem unconcerned or even care to understand the gravity of the situation. The only active strategy which is appearing successful is employing “Goebbels” with the task to keep on blowing fake trumpets about so-called economic progress. The government needs to realize that this strategy might be beneficial temporarily, but their inability to handle these problems is ruining the common man’s life while the hyper-inflationary environment is adversely impacting the overall economic situation of the country.  

It is a universal principle that both the demand and supply side of market forces contribute to generating inflationary pressures and any government has a crucial role on both sides of this see-saw. The demand-side is coped with through spending patterns and managed borrowings. However, since this government has taken charge it has broken all records of borrowing with the result that debts have gained so much weight that the financial infrastructure is on the verge of collapse. Due to inability to manage its expenditure and increase its revenue collection at a reasonable pace, the Governments reliance on the banking system for budgetary support continues to increase and the total domestic debt, as of October 21, 2021 increased by more than Rs. 10 trillion or 60% and reached approximately Rs. 27,140 billion.

On average, the previous government borrowed Rs. 121 billion per month, whereas the coalition government of Pakistan Tehreek-i-Insaf (PTI) has been borrowing at a pace of Rs. 260 billion per month. This abnormal pace of borrowing has increased debt servicing substantially and more than half of tax revenue collections are being utilised for this purpose alone— the cost of which is borne by the common man in the shape of heavy taxes and limited development expenditure by the state to improve his life. This can be corroborated through Annual Report of State Bank of Pakistan (SBP) on the economy which mentions that education expenditures as percentage of GDP decreased from 2.4% in Fiscal Year (FY) 18 to 1.47% in FY 20 and health expenditures registered reduction of 1.16% in FY 20 as compared to 1.20% of GDP in FY18.

On the supply-side government’s function is also important as its financial decisions can play a critical and decisive role in the cost of inputs and ease of doing business. On this front the PTI Government has miserably failed to offer any relief. Massive devaluation of currency and rise in energy prices has exposed all sectors and industries to the tsunami of inflation.

High import prices have contributed to deteriorating balance of payments and the current account deficits in the last two to three months have been beyond forecasts. The burden of these external pressures has largely fallen on the rupee which has already lost more than 40% of its worth in the last three years. Every next day, the dollar value sets a new record high which is above the mark, it achieved since the inception of the country. As a make-shift arrangement to fix this situation, the government has found an easy solution to borrow funds from international agencies and now at the end of the first quarter for FY 22 i.e. Sep 2021, Pakistan’s external debt & liabilities have ballooned to US$ 127 billion—a massive increase of 33% or US$ 31.78 billion since this government assumed power. Chronic issues like growing fiscal and current account deficits, rising inflation, growth deterioration and depleting foreign exchange reserves have assumed alarming proportions.

Administrative failure and incompetence of the government has resulted in situations like commodity management issues where wheat, sugar, and other items of daily use have witnessed shortages and unavailability.  Inflation was under control during 2013-2018, but has become rampant since then and every subsequent year has been more turbulent compared to the earlier year.

The poor decision of “free-floating” of rupee caused massive rupee depreciation and coupled with administration has jacked-up prices while the inflation numbers present a horrible picture. For November 2021, Consumer Price Index (CPI) was recorded at an alarming level of 11.5% on Year-on-Year (YoY) basis as against 8.3% during the same period last year. SBP’s Annual Report on Economy for FY 21 states that in FY 17 & FY 18 this number was only 4.81% and 4.69% respectively. It also mentions some worrisome statistics that during FY 21 inflation rate in Pakistan was around 9.0% which is more than double from the global average of 4.3%. A detailed analysis of the November 2021 report by Pakistan Bureau of Statistics (PBS) provides an insight that the “Food and Non-alcoholic Beverages group” recorded inflation of 10.47% and the “Housing, Water, Electricity, Gas & Fuels” witnessed inflation of 14.75% on a YoY basis. The top few commodities which significantly varied from the corresponding month of the previous year i.e. November 2020 that has added fuel to fire are as follows:

Food Group: Vegetable ghee (58.29%), Mustard oil (56.96%), Cooking oil (53.59%), Pulse masoor (22.38%), Fruits (21.67%), Meat (20.2%), Wheat flour (19.04%), Gram whole (14.69%), Beans (12.77%), Milk (11.71%), Vegetables (10.97%), Butter (10.83%) and Wheat (10.26%).

Non-Food Group: Liquefied Hydrocarbons (80.34%), Electricity charges (47.87%), Motor fuel (40.81%),Cleaning & laundering (21.17%), Footwear (16.20%), Washing soap, detergents & match box (14.41%),Motor vehicle accessories (13.99%), Household equipment (12.42%) and Drugs & medicines (11.76%).

With domestic energy tariff hikes and higher oil and commodity prices at the international level, it is expected that inflation will further rise in FY22. We can refer to the Asian Devolvement Bank’s inflation estimates for FY 22 which says that with a 7.5% inflation rate Pakistan will continue to be the most expensive country in this region. Inflation in Pakistan has already crossed double-digits and since the last 12-Month Moving Average is constantly hovering around 9% to 9.5%. To counter this inflationary pressure, the Monetary Policy Committee of SBP increased the policy rate by 25-basis points in September 2021 which was followed by another 150 basis points hike in November 2021 and expected to move further northwards. The business community which has hardly come out of pandemic-related challenges has expressed their concerns on these frequent rate hikes as it believes that any further raise can seriously hamper recovery and growth.

The emerging parallel pressures on both expenditure and revenue sides have shrunk economic progress and this poor performance should have been taken as a “call for action”. However, there is no improvement and things have worsened. During the tenure of the last government, revenue collection doubled in five years after blocking refunds of billions of rupees. The performance of the current government on this front is also below par, as it has not released those refunds for want of retrieval from divisible pool. However, it now intends to broaden the tax base and remove special tax treatments and exemptions to collect revenues well beyond Rs. six trillion during the current fiscal year.

The government is planning to introduce a mini-budget in December 2021. The burden of the new ferocity of taxes can have a drastic impact on businesses and households which are already reeling under an array of taxes. Government must actively work towards controlling its own expenditures and increasing its revenue in real terms so that the goal of a durable and self-sustainable economy can be achieved. Policies must be designed with a horizon beyond short term so that Pakistan can achieve sustainable and resilient economic growth.


Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions

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