I have of late been writing on how successive and rapid currency devaluations in Pakistan have not only been a catalyst, but rather the main drivers in fuelling the current wave of inflation in the country. With imports, at least in short term, being fairly inelastic and exports by and large confined to a peculiar value basket, such significant devaluations in low per capita economies bring little else but pain—the same has been true in Pakistan as well.

However, at the same time it is important to also evaluate other factors that have been principal contributors to the current runaway inflation, because this can help determine how inflation in Pakistan was brewing anyway and the downward currency jolts only made matters worse.

The last time perhaps the country witnessed such a steep phenomenon of inflation was as far back as the 70s and ironically the disaster recipe was no different: When increased government spending, supply chain shocks and rising wages all came together to generate inflation at the time, instead of taking policy measures to tame it, an abrupt and massive currency devaluation by Mr Bhutto’s government, exacerbated the problem. Another similar hiccup—but perhaps not of the same magnitude—was yet again witnessed during a PPP led government under Mr Zardari, only to be aided by a wave of currency devaluation.

To be fair, while commonalities still exist in the underlying dynamics from the 70s or even from the early 2000s, today’s modern day economies tend to be quite different. In the sense that collective bargaining in the professional sense now being a relic of the past, the ascent of globalisation being fast and rampant, and the shifting demographics per se, all collectively create an automatic buffer for any type of lasting inflation.

Normal economies these days often tend to see inflation as an after effect or an implication of an economy that gets back on to the path of growth as a result of policy induced measures, but then again normal economies (unlike Pakistan) do not support major currency devaluations or unnaturally high interest rates either.

An interesting study led by an economic historian, Rebecca I, Spang, at Indiana University, argues that for modern day economies, history does not repeat itself; in fact it can’t. “Recognising the complexity of any particular moment of the past may be irrelevant today, simply because most of the tools of connectivity simply didn’t exist at that time.” Meaning, unfortunately the governments today have to shoulder the responsibility of economic fallout squarely by themselves instead of the having the luxury to attribute them to any type of an economic cycle.

Let’s try and analyse the four main areas that have contributed to the present situation:

Monetary policy: Let us take it as a given that this Central Bank’s management also entered its period with the same two-part job: fostering stable inflation and maximum employment by keeping the economy growing on an even keel. However, initially it lost its way by focusing too much on inflation and killing economic activity as a result. When the lending rate did rationalise somewhat (still 200 basis points higher in the writer’s opinion), in came the string of devaluations defeating the very purpose of the initial focus on inflation.

Now the whole monetary framework seems compromised; the economy is rebounding owing to factors other than the monetary policy whereby inflation is rampant—as it is mostly externally driven—whereas the central bank finds itself with limited levers at its disposal to respond to the situation. The temporary bulwark against imports is quickly giving way putting more and more pressure on the Pak Rupee while the interest rate card already stands overplayed.

Fiscal policy: The current moment in Pakistan starkly resembles the period that laid the groundwork for America’s Great Inflation (70s-80s) in the way that saw in the US Government indulge in: A rapid increase in deficit-financed government spending coupled with ill-conceived taxation plans cum drives that not only saw private sector costs go up and an erosion of the competitive corporate culture, but also led to other undesirables such as a shrinking platform for the SMEs (the backbone of any economy) and growing gross anti-trust violations.

Supply side shocks: Though the phenomenon in itself is nothing new, as it has been visibly instrumental in fuelling inflation right from the 60s to the 80s by way of escalating global commodity prices, especially oil, but this time it takes a fresh and a more ominous form due to its effects being compounded by the Covid-19 Pandemic outbreak; something perhaps unprecedented in its magnitude over the economic history of the world. With globalisation well and truly entrenched where countries invariably look to international sourcing to keep prices under check and to maintain a sustainable flow of supplies in essential needs, the supply-chain disruptions in general due to curtailed production activities, higher costs of operations, expensive and curtailed logistics and a general sense of fear of shortages, are all stoking inflation like never before. As a result the global commodities also stands heated up at a highest average index over the three decades. Pakistan naturally cannot function in isolation.

Wages: The thing is that a part of the inflation of this nature tends to be irreversible. It is only natural that such inflationary patterns play out over a longer term and do not easily go away even when markets ease up. It has got to do with human psychology: Workers and businesses come to expect a higher rate of inflation and therefore adapt their behaviour accordingly, creating a self-sustaining cycle. In this of particular mention is the role of wages. Businesses can cut prices just as easily as they can raise them, but cutting wages is harder. Trust this is clearly being seen in the Pakistani wage markets today where wages are climbing disproportionate to the prevalent inflation level. Average corporate attrition is the highest ever witnessed in the country’s history and even the sought after employers are being forced to peg their pay packages at as high as the 75th percentile of the market (previous being around the 50th percentile mark).

To conclude, these are unprecedented times and clearly the economic managers need to do more if we indeed have to achieve the dream of a stable cum sustainable economy—clearly a holistic approach and some fresh thinking is required.