LAHORE: The economy is sliding, and the government is looking for an immediate financial bailout from the global lenders as it faces serious cash flow crisis. Inflation is running at 30-year high and real wages are stagnant or declining. But the consumers refuse to pull in their belts.

The aggregate demand remains strong and refuses to drop in spite of a series of money supply tightening measures announced by the central bank in the last one year. At any given time on any given day, shopping malls are filled with consumers, and imported goods and foods. What is fuelling consumer spending even in these bad times of the economy?

“It is true that the aggregate demand hasn’t declined, at least not significantly, if we look at the numbers for the last fiscal ended June 30,” a senior State Bank of Pakistan official, who requested anonymity because she is not authorised to give press statements, told this reporter from Karachi.

Unsure if the last two rounds of interest rate hikes since May to tighten money supply in the market had curbed consumption, the central bank official insists that the real picture would emerge only when “we have economic data for the first quarter to September of the current fiscal year”.

Shahid Kardar, noted economic expert, argues that the full impact of the present economic crisis is yet to be felt by the consumers. “It will take some time before the country’s economic downturn pulls down consumption,” he says.

He, nevertheless, warns against assuming that all consumers are continuing to spend and consume as ever before. “The price inflation, particularly food and energy prices, and the recent currency devaluation have affected the lower income consumers adversely. How could they not be hit when the prices are going through the roof into sky and wages remain static or have increased far below the high inflation rate?”

Retailers also point out slowing sales in the lower middle class areas. “The rising prices of food, transport and energy have eroded the purchase capacity of the fixed income consumers. These people are cutting expenditure on garments and shoes to save money for health care, education and food,” says Zahid Butt, who works as product quality manager for a garment retail chain in Lahore.

“Things are not as good as these were a couple of years ago. The increasing cost of living is taking its toll on the common people who are cutting essential spending to keep afloat,” Butt says, complaining a 30 per cent fall in his sales over the last one year.

There are a number of people who insist that the large informal or black economy is partly, if not fully, fuelling consumption even when the economy is facing difficult times. “We have a large informal economy, which doesn’t exist on the papers. In addition, we have very large segments of our economy -- real estate, agriculture, retail, stock exchanges, etc, enjoying almost tax-free income,” says Almas Haider, leading businessman from Lahore.

In the presence of a large undocumented informal economy and tax exemptions to certain sectors, it should not be surprising to see the central bank’s monetary tightening efforts to go down the drain, he says.

“In fact, the central bank’s monetary tightening is hurting the productive sectors and manufacturing rather than consumers. I would rather the government had different interest rates for different borrowers: lower interest rates for manufacturers to boost production and higher for consumers to curb consumption,” Haider says.

But there are also people who are opposed to curbing consumption. “It is consumer spending that is keeping the economy going,” argues former caretaker finance minister Salman Shah. “The government should not suppress consumption. It should facilitate consumption by reducing the cost of credit. We need to boost growth to get out of these bad times and not suppress it. If we curb consumption now, growth will also suffer. And that won’t be a good omen for the economy,” he insists.