inflation of Pakistan

Written by Daniyal Ali 8:47 pm Articles, Pakistan, Published Content

The Rising Inflation of Pakistan

Despite growing remittances, the inflation rate in Pakistan continues to soar with a current inflation rate of 9.2% in October 2021. This is a whopping increase from 3.93% in 2018. The author, Daniyal Ali, discusses the possible reasons — IMF and mafias — for this sombre trend, and recommends a course of action for the future.
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Mr. Daniyal Ali is currently pursuing a Master's in Media Studies from Beaconhouse National University.

Persistent Inflation

Recently, a report by the Economist Intelligence Unit has ranked the inflation rate of Pakistan to be the fourth highest out of a total of 42 countries. Each class in the country has been affected by this increased inflation, but the middle class and the lower class have been affected the most due to indirect taxation.

Inflation in the country has raised manifolds during the last three years while the salaries have remained the same. The recent escalation of the petrol price has also added fuel to the fire. Although the main moto of the PTI government was to counter inflation and to give relief to the poor, the real outcome of the government seems to be otherwise. Prime Minister Imran Khan, when in opposition, used to accuse the previous government of being corrupt.

There are multiple factors that are responsible for this increased inflation in the country and the import of food and energy which leads to the current deficit. While being in government, Prime Minister Imran Khan has always blamed particular mafias and cartels behind the inflation in the country. Indeed, he is right, but the people of the country hold that it is incumbent on him, as the Prime Minister, to put a stop to these mafias instead of merely blaming them.

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Pakistan’s economy has never been ideal, but the plight of the economy in this regime can be regarded as the worst. The country faced the highest inflation in the year 2009 when the whole world was passing through a financial crisis. The inflation rate in the country during that time hit 19.56 per cent.

Later, the year 2011 was the second year when the inflation rate reached a high of 13.66 per cent in the country. Since then, the inflation rate in the country fairly dropped, with 2.86 per cent being the lowest since 1986. However, inflation took hold of the country again in 2017, when the rate increased to 4.15 per cent.

This ratio once again fell in 2018, with an inflation rate of 3.93 per cent. The inflation rate has since then only soared. The inflation rate reached 6.74 per cent and 10.74 per cent in 2019 and 2020 respectively. This boom in inflation in 2020 was caused by the coronavirus. The inflation rate in the country now is almost 8.9 per cent as per Statista, with it having reached 9.2 per cent in October this year.

The EIU Report

This inflation in the country is likely to keep increasing for another six months and the rupee will continue to depreciate as per the reports of the Economist Intelligence Unit (EIU). This report came after the Pakistan Bureau of Statistics (PBS) released the data that depicted the Consumer Price Index to have increased to 9.2 per cent in October.

The EIU report holds that the augmenting inflation in the country is being driven by the rapid growth in the imports of the country. It further states that an increase in the prices of commodities globally after the disruption caused by the coronavirus is a major reason behind this inflation as the imports outweigh the exports.

The report suggests that this ascending pressure on consumer prices will continue into the 1st half of 2022 as the commodity prices are likely to remain elevated globally. Keeping the EIU report in mind, it is clear that the staple reason behind the increased inflation in the country is its imports which are largely based on food and energy.

Indeed, Pakistan’s energy imports could be justified somehow, but the food imports in an agricultural country like Pakistan seem strange. The most alarming fact is that Pakistan is also importing wheat from other countries. This is mainly due to the lack of focus on the agricultural sector. The oil purchases of the country outweigh all other imports. The global price increase of oil has led to increasing inflation.

Another factor that led to this soaring inflation in the country is the decrease in the interest rate by the State Bank of Pakistan from 13.25 per cent to 7 per cent in June 2020 which persists till now. The decrease in the interest rate leads to an increase in consumption and investment expenditure in the country’s economy which causes an increase in demand, leading to soaring inflationary pressure on the economy.

Is IMF Behind Inflation in Pakistan?

Pakistan signed an accord with the International Monetary Fund (IMF) after months of intricate negotiations on a bailout package worth $6 billion. This bailout package was subject to regular reviews of Pakistan’s economic growth and policies by the IMF. This deal was discontinued in January 2020 when Prime Minister Imran Khan did not follow the IMF recommendations to increase the price of electricity and impose new taxes.

Since then, Pakistani finance officials have been trying to conclude a deal with IMF to release $1 billion from the bailout package which the country needed desperately to stabilize the struggling economy of the country. Covid-19 also hit a hard blow to the already stagnant economy of the country by contracting it by 0.47% in the period 2019-20.

The IMF recently stated that it would disburse about $1 billion to Pakistan which would result in the disbursement of $3 billion out of the $6 billion bailout package. It is also alleged that the appointment of Raza Baqir as the chairman of the State Bank of Pakistan was also a part of the agreement between IMF and the government of Pakistan and hence many see him as an economic hitman of IMF.

Before that, he was serving in Egypt as the country representative of IMF to implement the plan of the monetary body. Dr. Ashfaque Hassan Khan, a senior economist, and Miftah Ismail, the former finance minister of Pakistan, had also stated in the past that the authorities being given to the Governor of the SBP under the stipulations of IMF would make him the financial viceroy of the country.

IMF has also directed Pakistan to let the rupee move freely without any state control. Although there does not seem to be the direct involvement of IMF in the rising inflation, the appointment of an economic hitman by the monetary body in Pakistan raises many suspicions.

Or Are the Mafias Responsible?

Prime Minister Imran Khan always criticized mafias and cartels involved in inflation. His entire electoral campaign was based on accusing the leaders of the other two major political parties, PML-N and PPP, of being involved in corruption and money laundering. He many a time stated, while he was in opposition, that corrupted leaders caused inflation in Pakistan.

Such statements still haunt him as the inflation in the country is touching new heights. He continues to blame mafias and cartels for the inflation, ignoring the fact that the onus is now on him to deal with such mafias and cartels. Indeed, the sugar mafia and other such mafias could be involved in hoarding and other illegal activities, but it is the duty of the government to deal with them.

As per a report published in the Dawn in January 2021, the alleged sugar cartel and hoarding caused an increase of about Rs 20 per kg in the price of sugar in 15 days. So, the fact that the cartels and mafias are involved in the growing inflation of Pakistan can not be ignored. On the other hand, the increase in petrol price is caused by multiple factors; one being the continuation of the IMF program. Similarly, the increase in the petrol prices internationally is also another cause of this increase.

The Way Forward

Indirect taxation in Pakistan is one of the major causes of inflation and so a mechanism must be adopted that imposes a direct tax on the elite. The agriculture sector should also be made transparent by keeping a check on tehsildars and patwaris. Increased industrialization is the only solution for any third world country to stand on its own feet.

The government must also increase the pace of digitalization and ensure one-window operations. Steps should be taken to train engineers and other specialists in the fields for which the government brings human resources from other countries.

Mining engineering is one of the leading needs, as there are many minerals in Pakistan, but the country always outsources these projects to international firms which take a considerable share of these resources, and the Reko Diq case is one such example.

Similarly, the youth should be trained in the field of Information Technology which is the future of the 21st century. Programs like E-Rozgar, Digi Skills, and other similar initiatives by the government are commendable in this regard.

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