What Pakistan's government can do about rising prices

What Pakistan's government can do about rising prices


Whether we like it or not, the first year of Pakistan Tehreek-e-Insaaf’s government will be remembered as the year of low economic growth and high prices. While the former has implications for poverty as low production growth results in unemployment, the latter hits the middle and low-income groups hard and squeezes even the most essential consumption.

Several factors in the end contributed to a hike in prices. Most notably, these included rising electricity, gas and transport fuel prices; depreciation of the exchange rate; persistent government borrowing arising from, among other reasons, energy sector costs, losses in public sector enterprises and the inability to reduce the overall size of the public administration. This fiscal deficit — the gap between the government’s revenues and spending — also remained high due to the increased burden of interest payments and expenditure on security, law and order. To provide some numbers, government borrowing since the start of fiscal year 2019 now stands at PKR 4.8 trillion which exhibits an increase of 2.4 times if compared with borrowing undertaken during the same period in the last fiscal year. 

The expectations of future high inflation are also a cause for concern for the common man. The central bank could have done a better job of managing inflationary expectations by providing a more confident future outlook and a clear economic growth road map – if any – under the upcoming IMF program. Expectations continue to fuel inflation and despite some easing in the consumer price index in April, the year-on-year growth in prices for the month of May stood at 9.11 percent with an upward price trajectory seen for food, electricity, housing, water and fuel. 

This will inevitably hurt the poorest and their consumption. Rising prices of inputs and particularly imported raw material and machinery have also increased the overall cost of production. In fact, private sector borrowing  rose during and after the second quarter of fiscal year 2019 to cover the working capital requirements which increased in rupee terms. Going forward, the PTI government now needs a clear strategy to: a) explain to the public why the country is experiencing a five-year high in inflation levels, and b) exhibit that both fiscal and monetary policy measures have been put in place which will reduce the burden of fast rising prices on the poor. 

First, to manage inflationary expectations, the government needs to be more transparent regarding the details agreed under the IMF’s Extended Fund Facility. The financial and asset markets are filled with all sorts of rumors regarding future movements of central bank’s policy rate and how the flexible exchange rate is expected to behave. The Ministry of Finance needs to play a better communication role in letting markets know how both these variables will work to the benefit of the economy in the future. Of course this assessment needs to be grounded in a medium term economic framework which is presently missing.

Expectations continue to fuel inflation and despite some easing in the consumer price index in April, the year-on-year growth in prices for the month of May stood at 9.11 percent with an upward price trajectory seen for food, electricity, housing, water and fuel.

Dr. Vaqar Ahmed

Second, indirect taxes faced by the poor especially in the case of food and fuel still remain high. It would be best for the government to consider a reduction in such taxes. Several such taxes fall under the domain of provincial governments and they may also pitch in to reduce the overall burden of taxes on prices.  

Third, the government requires radical thinking on how to improve the savings of the poor and middle-income group. After all, their savings help during times of persistent price hikes. Also, savings help in kick-starting the next wave of production in the economy. This can be achieved by increasing the minimum wage to the level of ‘living wage’ as estimated by several independent think tanks. Just announcing minimum wage will not help. The government will need to be tough on both formal and informal employers so that minimum wage laws in Pakistan can see proper implementation.

Fourth, the Ehsaas Programme should clearly identify and target the informal sector labor, farm labor, disabled and vulnerable segments of the population. By just providing stipends, the government will only protect them from the short-term effects of inflation. It would be best to allow the poor access to non-collateral loans which can help self-employment in the long run.  Similarly, more innovative ways of working are required at Pakistan Bait-ul-Mal so that the beneficiaries are able, overtime, to exit the poverty trap.

Finally, and this is where financial inclusion becomes so important, the majority of those who will be hit the hardest by the low economic growth milieu do not have a clear understanding of how they can protect their household savings from erosion in real terms due to the effects of inflation. And this is where the federal government’s National Savings Schemes must increase its outreach and offer more attractive rates at least for those who face the terrifying spector of cyclical unemployment.

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point-of-view