Navigating inflation: Lessons for troubled economies


Navigating inflation: Lessons for troubled economies

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As the caretaker government seeks short-term solutions to economic challenges, Pakistan's inflation is rapidly approaching the stubbornly high levels seen in Argentina, Lebanon, and Turkey. The country-level factors that have contributed to the persistent rise in prices in all these economies can be broadly categorized into political, economic, and external factors.

Argentina has experienced high price inflation due to a combination of political mismanagement and economic instability. Frequent changes in government policies, including currency controls and excessive public spending, have eroded investor confidence and led to a depreciating currency. This, coupled with high levels of public debt and fiscal deficits, has fuelled inflationary pressures.

Turkey's inflation woes can be attributed to a mix of factors, including political interference in monetary policy, a history of populist policies, and external pressures such as currency depreciation and rising global commodity prices. The central bank's inability to maintain its independence and adopt tight monetary policies has contributed to persistent inflationary pressures.

Lebanon's high price inflation can be traced back to its deep economic and political crisis. The country's political instability, coupled with a severe financial collapse and a reliance on imports, has led to a sharp depreciation of the Lebanese pound. The resulting scarcity of foreign exchange, coupled with a lack of confidence in the banking sector, has contributed to skyrocketing prices and hyperinflation.

In Pakistan too, inflation has been driven by a combination of domestic and external factors. Besides the ongoing political uncertainty, the country faces structural issues like energy shortages and food price volatility, which have been exacerbated by inconsistent policies, growing public spending, and governance challenges. Additionally, external factors such as rising global oil and commodity prices often put a further strain on the economy, contributing to high inflation. 

The outcome of the above-mentioned is also similar across these countries. High inflation is having a significant impact on the lives of ordinary people, making it more difficult to afford basic necessities such as food, shelter, and transportation. It is also putting a strain on businesses and governments, making it difficult to plan for the future. Mob activity on the streets has become a common occurrence, with public offices being set ablaze in broad daylight, and street crime running rampant.

Regional integration holds the key to bringing down food prices. 

Vaqar Ahmed

Foreign advice is now pouring in for these countries. The lenders supporting these massively debt-ridden economies are pointing towards evidence and more specifically four main elements which have brought back several countries from the brink of default. 

Political stability will revive local and foreign investor’s interest. It could prevent human and capital flight. When businesses know that the government is stable and there is a low risk of political violence, they are more likely to invest in the country. With supply-side expansion, prices stabilize in the medium-term. 

Strong institutions can reduce corruption. When there is an independent judiciary and a transparent public sector, it is more difficult for corrupt officials to steal from businesses and citizens. By combating corruption, governments can streamline public spending, foster a fairer and more competitive business environment, and ultimately, mitigate the factors that contribute to price inflation. 

The rule of law can protect property rights. When property rights are protected, businesses are more likely to invest and innovate, knowing that their investments will be secure. 

Regional integration holds the key to bringing down food prices. When countries within a region trade more freely with each other, barriers to trade such as tariffs and non-tariff barriers are reduced or eliminated, enabling businesses to access larger markets and a wider variety of goods and services. Moreover, as countries specialize in producing goods, the allocation of resources becomes more efficient, reducing supply-side inefficiencies that can drive up prices. 

To conclude, almost all the above-mentioned countries have recently replaced their economy managers. All the new appointees have stated that they had no idea how severe the economic crisis was. The learning curve is steep, and everyone must stick to the IMF-agreed path to instil confidence in bilateral and multilateral development partners. The bigger question is whether the new economy managers in these countries are willing to take on the elites. Are the elites in these countries prepared to bear the costs of adjustment?

— Dr. Vaqar Ahmed is joint executive director at the Sustainable Development Policy Institute (SDPI). He has served as an adviser to the UN Development Programme (UNDP) and has undertaken assignments with the Asian Development Bank, the World Bank, and the Finance, Planning, and Commerce Ministries in Pakistan.

Twitter: @vaqarahmed​

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