IN a country more accustomed to high inflation than this malaise in moderate measure, what will happen if, contrary to the hopes of the State Bank of Pakistan (SBP), the double digit inflation does not come down in the “next few critical months”. The State Bank recognizes that a sustained high inflation can curtail the rapid economic growth, upset the external balances far more and eventually force devaluation of the rupee and multiply the hardships of the people.
But the SBP’s role is confined largely to the monetary sector — the money supply, regulation of interest rates and denying bank credit to the hoarders and price pushers. In other critical sectors of the economy, which contribute to aggravation of the inflation, the role of the vocal governor of the SBP, Dr Ishrat Husain, is largely advisory.
It is not that the government has not taken some measures to contain the inflation. But they have been far from effective because of the obduracy of the forces pushing up prices by acting in concert, much too defiantly.
And the SBP on its part has pushed up interest rates all round so as to reduce private sector bank borrowing which has peaked to Rs362 billion in the current financial year up to April 21, against Rs325 billion for the whole of the last financial year. Even the yield for treasury bills has been raised to 563 basis points.
If the 11.1 per cent inflation continues or becomes worse, the more the government spends on development, the less the country will get in return. Development projects will become too costly in rupees and yield less than they would without high inflation. That means the rate of economic growth will be eventually less than the eight per cent or more we are proudly talking of, and hoping for higher growth.
If the rupees gets devalued as it comes to cost more than Rs60 for a dollar, all imports-including machinery, will cost far more. And oil can become much too expensive. We cannot afford such multiple risks.
Controlling inflation through the monetary means had been a failure in the past. The reason is there is too much money outside the banking system in the country. The currency in circulation in the country is very large and close to Rs700 billion in spite of the too many banks we have.
Mercifully, the currency in circulation has come down from Rs702 billion in January last to Rs665 billion in March last— a fall of Rs37 billion for reasons not clear. And when the banks reduce their credit, the money in circulation moves faster as in all high inflation environments.
People in inflationary environments want to spend their earning before prices rise further. In the worst days of Turkish inflation, if the salary earners got their pay in the morning they insisted on leaving their work places immediately so that they would buy what they need before the afternoon when prices rose further. They were in such a frantic hurry to make the best of their depleting earnings.
The very low interest rates on deposits also make the people to spend their money fast as they gain little or nothing by holding on to their money while prices shoot up.
The weighted average rate of interest on bank deposits, in December, according to the SBP, was 1.32 per cent while weighted average interest on bank advance in the same period was 6.99 per cent. The ratio of the interest rate is five to one in favour of the banks. So better spend your money instead of keeping in the bank for such ridiculous returns.
To beat the inflation the government has to import essential goods in abundant supply. And that has to begin with food items, whose prices have risen very high. What happened to the onions, potatoes, tomatoes and garlic we are supposed to import from India along with Halal meat and bovine cattle? All that is supposed to come tax-free to make them cheaper for the masses. We haven’t heard much about the movement of such goods after the formal official announcement was made with considerable fanfare. Where are the bottlenecks? How are they being removed? It is time we are told the facts. And if there are bottlenecks in the movement of such goods, they should be expeditiously eliminated.
The SBP’s quarterly report has spoken of the regulatory and administrative measures for ensuring adequate supply of such essential goods in short supply. Evidently, the measures taken by the government are not adequate. They need to be looked into with greater care so that there is a free flow of the goods in apparent short supply.
Corruption and red rape in the administrative machinery which hinder steady supply of such goods should be eliminated. There is too much corruption in the market committees and other mechanisms dealing with such supplies. And they need to be eradicated urgently.
The utility stores should also be made more dynamic and effective. They have a key role to play in this area, although their number is small, and they tend to be too slack and bound down now by red rape.
The profit margin in this area is so large, the traders do not hesitate to borrow money from private sector lenders at any rate for a short while. Hence denial of credit by the banks for such trade does not hurt the traders to much.
The high cost of transportation of such goods and high power rates or cold storages also raise the prices of such articles excessively. Even otherwise the people borrowing from the unorganized sector, particularly in the rural areas, are accustomed to paying a very high rate of interest, up to 100 per cent in a year, and if default occurs, the amount repayable goes on doubling each year. That is the kind of usury which Islam forbids.
In such a frightfully unhealthy environment, even extraordinary high bank interest rates do not check inflation. That was proved amply when Moeen Qureshi as the caretaker prime minister raised the bank rate to 20 per cent and the leading rate to 23 per cent, inclusive of one per cent central excise duty. That was kind of Caesarean operation did not deliver the baby. Banks were then lending to their customers at 25 to 30 per cent. And yet the margin of profit of the borrowers was large enough to accommodate such heavy interest rates.
When money is available in plenty outside the banking system and at rates which the large profits of such transactions can accommodate, the SBP’s current monetary measures are not enough to bring down the inflation.
The SBP report talks of regulatory and administrative measures to bring about the desired results. It is here the government and the enlightened among leaders of the private sector have to concentrate.
It is one thing to give the private sector all the freedom in the area of investment, tax relief and other legitimate incentives which the private sector needs and something vastly different to permit cartels like the sugar mills and cement factories to flourish on their own terms.
If the sugar mill owners and the stockists will turn a surplus situation into a shortage and cement prices will go up immediately after large tax relief to the industry is given, that is not something permissible.
And if the flour mill owners and other stockists of wheat, too, would turn a surplus situation into a deficit and let the prices soar, the government and society cannot permit that either.
The basis of a free market is competition—open and fair— and not hoarding or cornering the market and jacking up the prices, acting in concert. The big traders and following them the medium ones, have got the wrong interpretation of a free market. They think that is a free-for-all market with the consumer always the loser.
There is no use avoiding a confrontation with the monopolists, cartel-makers and hoarders. How can the government let traders turn a surplus into a shortage and make imports too go underground and let all remedial measures fail? They are the immediate beneficiaries of fast economic growth and they should play fair with the community.