Pakistan Reader# 549, 2 February 2023
On 1 February, according to monthly data released by the Pakistan Bureau of Statistics, annual consumer inflation reached a near high of 27.6 per cent, due to elevated prices of food and transportation caused by uncertainty in global trade prospects, damage by floods and exchange rate depreciation. The consumer price index (CPI) in January 2023 increased by 230 per cent when compared with CPI in 2012. The highest ever observed CPI was 27.8 in May 1975. IMF in its world economic outlook has revised upward the inflation rate for Pakistan, i.e., from 19.9 per cent to 21 per cent in 2023, attributing the raise to floods and exchange rate depreciation. It is important to reflect on the nuances, policy measures and past experience of higher inflationary periods.
1. Rural and urban inflation.
Inflation in rural Pakistan has been more painful due to higher food prices, and the current regime of high rural CPI has been continuing since 202. Floods of 2022 have impacted the prices of raw materials like cotton and sugarcane in Pakistan. Essential commodities like wheat, oil and sugar are subsidized to shield the rural masses from skyrocketing prices, yet still, the policy of subsidization has been ineffective. The concentrated nature of sharecroppers working for the landowning political elite. According to the World Bank estimates of 2018, rural poverty stood at a stark 36 per cent or twice the already-high urban poverty rate of 18 per cent. Recent decision by the government to increase the price of petrol and diesel prices by PKR 35 will bring more bouts of incessant CPI across Pakistan.
2. Past experience of high inflation.
CPI was at 27.8 in May 1975, the second highest after that has been the CPI during August 2008 at 25.8. According to ‘Issues in Pakistan’s economy’, authored by S Akbar Zaidi, the reasons behind double-digit inflation in Pakistan have been the growth of money supply in relation to GDP; increases in prices of food, raw materials, fuels and manufactured goods; currency depreciation and devaluation; supply shocks; production losses due to power and infrastructural bottlenecks and insufficient tight financial policies with high budget deficit financing. The reasons resonate well in today’s times, except that the supply shocks are ever uncertain than before. All the post-colonial nation-states are suffering from this uncertainty and hence inflation is pervasive as well in a range of peripheral countries.
3. Inflation as an aggregate number.
On 25 January, the State Bank of Pakistan raised the policy rate by 100 basis points to take it to 17 per cent and stated the objective to rein in inflation. Inflation in advanced economies is guided by Phillips Curve, however, with strong market fundamentals. However, in third-world countries/ peripheral capitalist societies, market fundamentals are weaker and there is no single dominant class, the predicament on the Phillips curve has not yielded significant results. There is not much sufficient evidence to establish, independently the increase in unemployment or money growth to prove chronic inflation. According to Hafiz Pasha, there is a need for sectoral evaluation and dependence, the tendency to explain the aggregate ‘general price level’ thwarts any effort to understand the cause and devise appropriate policy actions rather than being guided by an aggregate number. The manufacturing industry in Pakistan, for example can be the core of growth stimulation rather than the trade or financial services.
Hafiz Pasha, et al., “What Explains the Current High Rate of Inflation in Pakistan,” Pakistan Development Review, Vol 34, No. 4, 1995
S Akbar Zaidi, “Issues in Pakistan’s Economy,” Oxford University Press, 2015