When Loki strikes

April 08, 2019


Here are some facts: headline inflation in March 2018 was 3.2 per cent. In March this year, it almost tripled to 9.4pc.

In March 2018, annualised food inflation was a negligible 0.1pc, but now it is 8.4pc. In March last year, non-food inflation was 5.4pc year-on-year. But in March this year, its pace of increase almost doubled to 10.1pc.

These facts, reported by the Pakistan Bureau of Statistics (PBS), have come as a crude reality check for the PTI government. But the party leadership insists things are bad due to “plundering of national wealth” by the ruling parties of the past — the PPP and the PML-N. This is politics.

People, meanwhile, continue to suffer. Asian Development Bank (ADB) says economic growth this year will be 3.9pc — down from the last year’s revised growth of 5.2pc. Energy prices are going up. Prices of agricultural inputs and industrial raw materials are on the rise.

Should consumers hope that any move to check business malpractices that fuel inflation will succeed?

The rupee is down. Even after losing about 22pc value against the dollar in the fiscal year to March, it remains on the slide. In fact, the rupee came under fresh battering in the first week of this month. Higher input prices combined with the weaker rupee continue to fuel inflation. Surging inflation is squeezing disposable incomes of those who are lucky to find work. Lots of others are searching for jobs in vain as job opportunities disappear in years of slower economic growth. Negative growth in the manufacturing sector, slower-than-expected expansion in agriculture and a combined effect of both on the services sector are throwing even once-employed people out of jobs.

Economists are guesstimating job losses of 400,000 to 600,000 during this fiscal year. Some of them like Dr Hafiz Pasha and Dr Ashfaque Hasan Khan warn that the trend will continue through next few years if policymakers keep healing the economy with the bitter pills of a stabilisation package.

But, then, there seems to be no way out — not in the near future at least. Finance Minister Asad Umar says the balance-of-payments support package from the International Monetary Fund (IMF) will come pretty soon. We know by experience that the IMF is fond of treating our economic ills with a full dose of the medicine called stabilisation.

Now consider some more facts: the federal government borrowed Rs3.42 trillion from the State Bank of Pakistan (SBP) in less than nine months of this fiscal year (up to March 22). In the comparable period of the last fiscal year, the government’s borrowing from the central bank was Rs1.24tr. Borrowing from the SBP is a byword for fresh note printing — the most notable driving force of inflation. Reserve money growth, which makes a more direct impact on inflation than broad money, was around 6.3pc during this period against 3.7pc a year ago.

Small wonder we continue to see an increasing trend in core inflation, which is measured after netting off the impact of energy prices.

But the government borrowed heavily from the central bank to retire old debts of commercial banks so that they could lend to the private sector. Their lending to the private sector grew to Rs558bn between July 1 and March 22 of this fiscal year.

During this quarter, even if the borrowing from the central bank remains subdued, offering some inflation-easing help on top of tightened interest rates, taming inflation will not be easy.

The reason is that the rupee is almost sure to lose more value against the dollar for two simple reasons. The Fund wants greater exchange rate flexibility ie no dollar-pumping into the interbank on a net basis.

The country has borrowed equivalent of $9.2bn so far during this fiscal year from China, Saudi Arabia and the United Arab Emirates. That has helped it augment the central bank’s foreign exchange reserves, which are currently around $10.5bn. But between April and June, external debt financing of about $2.5-3bn will likely keep the rupee under pressure.

One big problem in tackling inflation is that competition laws are not very comprehensive and their implementation remains weak.

Mr Umar has hinted that the government may review laws on price regulation and make market committees more effective to prevent prices of essential food items from becoming too volatile.

But under the 18th Amendment, agriculture is a provincial subject. As such, making the desired improvements in agricultural supply chains to check food prices needs effective coordination between the federation and the provinces. That is lacking right now.

Instead, political heat is growing. PPP Chairman Bilawal Bhutto Zardari is threatening to overthrow the government if an attempt is made to withdraw the 18th Amendment.

Should consumers hope that any move to check business malpractices that fuel inflation will succeed? Your guess is as good as mine.

Published in Dawn, The Business and Finance Weekly, April 8th, 2019