Inflation is an issue which is gripping Pakistani public today and questions are being asked on how come in just 2 years the food essentials almost rose by between 100 percent to 115 percent—June ’18 over September ’18: Sugar about 110 percent, flour 114 percent, lentils at more than 200 percent and cooking oil around 37 percent? Ironically, the thing is that given the economic policies over the last two years this hardly comes as a surprise. If we add up the numbers on effects that different policy measures have had on pricing an item, we see that the results in shape of today’s prices come out not much different than we are witnessing at present. Ever since January 01, 2005, when WTO’s free and fair trade directives came firmly into effect, calling for free flow of goods and gradual reduction of tariffs to zero or at best 5 percent amongst all its signatories (Pakistan included), most basic food essentials in Pakistan (including vegetables that bear a direct correlation with neighbouring supply chain from within SAARC nations) today carry a direct parity with respective import substitution. Essentially, this means a strong correlation of domestic prices with international prices based on the prevailing exchange rate. Naturally, when the Pakistani Rupee devalues, in return we witness a surge in price inflation both in the shape of cost-push and demand-push. While demand push is relatively simpler to explain, meaning that if prices at home are cheaper than abroad the goods will flow out as outside demand will kick-in or vice versa, the cost-push resultant inflation however needs a bit of explaining. Pakistan’s economy has predominantly relied on import for more than 3 decades now (GATT Agreement/WTO 1985) and therefore every time the rupee devalues input costs go up. Further, a survey conducted on agriculture-based industries and additionally on consumer goods industries based on agricultural back in 1987 and then the latest in 2008, reveal that the use or reliance on imported inputs or components in these industries since 1987 to 2008, has increased from anywhere between 15 percent to 25 percent to between 25 percent to 45 percent. So, naturally when the rupee devalues (imports become dear) or simply the international prices of these inputs go up, the result comes in the shape of cost-push inflation. Other items that also significantly contribute to cost-push inflation include labour, utilities, taxation, excessive regulation and market perception.
So, what happened here in Pakistan? If one dissects the drivers of inflation over the last two years, the emerging pictures comes out something like this: Exchange rate: 43/44 percent (Rupee: Dollar parity was 115:1 in June ’18 against 165:1 in September ’20). Interests rates: As interest rates moved from 6 percent to 13.25 percent, this added about 5 percent to the underlying cost-of-production in the documented sector and approximately 10 percent in the undocumented sector—Pakistan has a very large undocumented sector where informal lending rates climb much faster and higher based on credit availability and futures’ sentiment; Government’s unnecessary and over ambitious tax drives, scare tactics, ill planned registration (tax net) initiatives, and tweaking of tax slabs cum removal of zero rating, all added another 15 to 20 percent directly to prices; continuous increases in gas and electricity tariffs roughly contributed 10 percent to production costs, ultimately reflecting in sale prices; and last but not least a market perception on an inflationary wave remained largely unchecked through any substantive threat on import substitution from the government—virtually giving free license to retailers to inflate their profits—adding another 10-20 percent to prices. Now, add all these up, apply them to the base prices prevalent in June 2018 and one more or less arrives at the price points of today.
This then takes us to the more important or relevant question that what should and can the government do to bring the prices down of essentials in the coming days—of items that matter the most to the common man? Well, the simple answer is to improve its economic governance, but more specifically, to primarily focus on its supply side dynamics. Just undertake the very policies that it had said it plans to adopt prior to assuming power (manifesto): Ensure an enabling environment to do businesses; enhance revenue through enhanced economic activity instead of sucking capital out of markets; lend confidence to the markets instead of spreading panic in them; now that the current account is in surplus; revalue the Pak Rupee gradually to preferably around the 150 mark by June 2021, reduce interest rates to between 5 to 6 percent to kick start investment; reinvigorate (on commercial lines through private public partnerships) key national price control and supply chain institutions such as the CCP, TCP, PSA and others; restore zero rating on the five main export sectors; ensure stable utilities prices, which will only be possible by ringing the much awaited reforms and legislative changes in running of the state-owned enterprises. Regrettably, its present economic team has not delivered and perhaps it may be time for it to choose a fresh team for the duration of its remaining half term.
Finally, on to a much larger debate, given the mounting tension and heat being generated by the opposition through PDM, it has now become more essential for this government than ever before, to make things work, since it appears that the very future of democracy in Pakistan may depend on it. Recently, a very powerful book was shared with me by its author Saqib Iqbal Qureshi, a Pakistani origin Canadian citizen, graduate & doctorate from the London School of Economics, who in this latest book, ‘The Broken Contract’, argues on making our democracies accountable, representative, and less wasteful. He explains how democracies of today are failing the public in these three important areas and in turn losing the trust of the very people they endeavour to serve. In essence he urges the intelligentsia to start a conversation with both the elected and unelected leaders of the country in order to bring about a meaningful change that puts delivery to people first and that too on time. And by the way, all this he is advising mainly in context of his experience with developed western democracies of Canada, USA, UK, Australia & New Zealand, so just imagine that if a feeling is today emerging in those societies on the need of such an initiative, how urgent and necessary it is to start a similar exercise here.