The nightmare of too much money chasing too few goods
Read More »The News on Sunday (TNS): According to the Pakistan Bureau of Statistics, inflation in Pakistan is at a four-year high at 7.2 percent and the component of non-food non-energy items is showing a steady rise; this is despite the tightening of the monetary policy by the State Bank of Pakistan (SBP) which has raised the interest rate by 4.50 percent in one year. Would you agree that Pakistan’s economy is in dire straits? How do you look at the SBP’s current monetary policy? Will it be able to stabilise the economy?
Dr Nadeem Ul Haque (NUH): Yes and no. Economy is not in dire straits but certainly in a difficult situation. Pakistan economy has always performed in a strange way. In the sense that the ministry of finance (and the government) is always trying to kill the economy because they are stuck in the realm of extractive, colonial state. The bureaucracy, the judiciary, the army still behave in a colonial fashion. Only the informal sector drives our economy and that’s very good; it’ll continue to kick away. However, presently, our bureaucracy is working overtime, alongside the donors, who are thriving on wrong analysis of the country. Donors don’t understand us. They’re trying to tax us to death and driving the informal economy down. So obviously there are problems. Inflation in Pakistan is going up but the good thing is inflation in the world is low — and that’ll help us, because our inflation is normally linked to global inflation. Right now, whatever we import will not be expensive. Stabilisation of the economy is not a joke. Economy is not like a fighter plane that the finance minister can fly at will. The economy runs on its own. Economy is what is produced by people through their own exchange and institutions. But if we continue to hold on to colonial institutions, yes, there will be problems because they are designed to be extractive. The help from IMF may stabilise the Pakistan economy in the short run but in the long run borrowings have to be repaid. Getting growth up to 5-6 percent will become very difficult. The only way out is modernising the colonial structure. The raj infrastructure based on cronyism has to go. This is a long-term solution and, believe me, there are no short-term solutions in this country. We must learn to manage our economy by starting to bank on professional management and professional, decentralised decision-making and create a huge demand for data and research. Politics must be separated from economy. The economy is not a political enterprise. TNS: Was it in the interest of the country to keep the exchange rate unnaturally overvalued in the country in the last five years or so? The past year has seen the Pak rupee go down by almost 40 percent against the US dollar. How are the exchange rate policies of the past impacting the present? And what does the future of rupee entail? NUH: The State Bank of Pakistan has muddled up for the last 70 years. It doesn’t understand its exchange rate policy. They and many of our economists think that the exchange rate must be overvalued. Volumes have been written on how overvaluation of currency harms the economy, and, yet, for the last 70 years, we have overvalued the rupee. It’s pure stupidity. The finance ministers guide our monetary policy, and that’s why the IMF is arguing that the central bank should be independent. The only way out of this mess is to refrain from any kind of intervention — just leave the exchange rate to the market. No finance minister or even prime minister should have the power to control our currency rate. The SBP should never throw dollars in the market. The government must purchase dollars from the open market to pay its bills, not borrow from the central bank. TNS: Pakistan’s budget deficit is estimated to increase to 6 percent of GDP in financial year 2018-2019 (Fitch Solutions). Are we likely to see more public sector projects? Can we still afford to build metros and motorways? Where will the money come from? What’s the way out? NUH: The real budget deficit is close to 9 to 10 percent because in the 6 percent they have not included the circular debt and the PSE losses. If one includes all of this then the budget deficit will increase to 9 to 10 percent. Strangely, the fiscal deficit depends on how the government defines it. I think all public sector projects should be put on hold for the next 5 to 6 years. The ongoing ones should be completed. Because, first, there’s too much wastage of our precious resources in our public sector developments, and second, our public sector projects are too politicised. In the future, the PSDP must be fully segregated from politics. Only the cabinet, through the parliament, can give direction to our public sector development. Politicians should not be able to whimsically make highways leading to their houses in remote villages nor should ministers or chief ministers be able to dictate the design of ring roads or metros. Project design and selection must be on technical grounds based on procedures. No one should have the power to bypass those procedures. Due to politicians’ pressures, the emphasis is on roads, even though few in this country own cars and the environmental costs are high. Railways, the poor man’s transport, has been totally ignored. We don’t need any more roads. We have already built more roads than we need. We may need more in future. These roads are not even paying for themselves. Let’s think of cleverer ways in public sector development. We have made 200 universities but not a single one is worth its name. It’s time to ask tough questions. TNS: The PTI government is relying on indirect taxation and on external financing than on economic activities. Agriculture is clearly a casualty of this rule. Though in the recent mini-budget, Finance Minister Asad Umar announced incentives for banks to offer agricultural loans by reducing the tax rate from 39 percent to 20 percent on their interest income, it has failed to satisfy the farmers who maintain that this will not reduce the cost of production and increase the access of small farmers to short-term financing. Being an agrarian economy, shouldn’t there be more focus on generating agri-related activity to fight inflation? NUH: We’re not an agrarian economy. The latest census discloses we are over 50 percent urbanised using obsolete definitions. Reza Ali, a researcher, has used satellite data to show that we are over 70 percent urbanised. With a proper definition of urbanisation, the census will also show us that we are more than 70 percent urbanised. We are probably one of the most urbanised countries in the world. It’s a myth that we are rural. The contribution of agriculture to our GDP is 20 percent. Anywhere in the world, development happens only when urbanisation increases and agriculture’s share in economic activity decreases. Let’s stop attempting to favour agriculture. Let industry, service and agriculture all grow — productivity of all three sectors must escalate alongside innovation and entrepreneurship. TNS: The latest United Nations report projects economic growth in Pakistan to slow down in 2019 and 2020 to below 4.0 percent. What downside risks do you foresee? NUH: The exchange rate policies have always slowed down our economy. They have always been responsible for our balance of payment situations. There is no doubt about it. The biggest downside is that we don’t want reforms, and by not introducing appropriate reforms the government is dumbing down the people. Growth is an urban phenomenon. Sadly, we have ruralised our cities and have over regulated investment in urban areas. This is a huge cost to the economy. TNS: In your book, Looking Back: How Pakistan Became an Asian Tiger by 2050, you create a fantasied Pakistan, that has reached a stage of development where it is capable of launching a spaceship, where you propagate a bottom-up approach to develop the community and opportunities for youth. In today’s Pakistan that’s nothing rather optimistic. With inflation on the up, the family finances are squeezed. Life is more expensive. How will a common man live your dream? NUH: The common man is living his dream. He is looking after himself very well. In fact, the government is preventing him from further prospering and living freely. The middle class has grown and is more prosperous because it has migrated to mainly the Middle East, and is sending back remittances. They are growing because they are smuggling in mobile phones and tape recorders. By preventing them to bring in these lifestyle products, the government is trying to hold them back. What’s the big deal if they smuggle these things in? It only bothers the raj! Smuggling is only a by-product of the government’s bad policies. To grow, a bottom-up approach must be adopted. Also read: Desperate measures My theory of development is very simple. I keep the quality of life at the core, and quality of governance, vibrant markets, energetic youth and community and creative cities surround it. Market and governance are the parents of the economy and development is the child. In Pakistan, the child is suffering because the colonial government is stunting market and city development as well as imposing huge regulatory costs everywhere because of its DNA of control and extraction. In order to grow, I hope that Prime Minister Imran Khan can reform the governance structure from colonial command and extraction to a modern thoughtful, decentralised, professional and non-politicised. This structure, in turn, will thoughtfully develop markets and cities for the 21st century. People will then respond with their entrepreneurship and innovation. The promise of Pakistan will then be realised. [post_title] => “The economy is not a political enterprise” [post_excerpt] => [post_status] => publish [comment_status] => open [ping_status] => open [post_password] => [post_name] => economy-political-enterprise [to_ping] => [pinged] => [post_modified] => 2019-02-10 01:58:56 [post_modified_gmt] => 2019-02-09 20:58:56 [post_content_filtered] => [post_parent] => 0 [guid] => http://tns.thenews.com.pk/?p=95252 [menu_order] => 0 [post_type] => post [post_mime_type] => [comment_count] => 0 [filter] => raw [format_content] => ) [2] => WP_Post Object ( [ID] => 95250 [post_author] => 29 [post_date] => 2019-02-10 03:20:54 [post_date_gmt] => 2019-02-09 22:20:54 [post_content] => The State Bank of Pakistan (SBP) on January 31, 2019 increased the key discount rate by 25 basis points to 10.25 per cent, which was a six-year highest. This rate is effective from Feb 1. Before this adjustment, the central bank had surprisingly increased the discount rate a month earlier by 150 basis points to 10 percent from 8.5 percent to ensure economic stability after massive devaluation of the Pakistan currency. Bankers say the rise in the key policy rate was essential in the wake of increasing inflation, which was 7.2 percent in January 2019. Economists point out that a gap of more than 2 percent between inflation rate and discount rate is indicative of a tight monetary policy, whereas if inflation is 10 percent and discount rate is also 10 percent then it shows a loose monetary policy. While announcing an increase in the discount rate, the SBP stated it was also necessary to curb the persisting inflationary pressures, worsening fiscal situation and continuing the current account pressures. The SBP Governor, Tariq Bajwa suggested the government to vigorously pursue to further reduce the fiscal and current account deficits to put the economy on a long term positive trajectory. The upward revision in the policy rate by the central bank, which would also affect the commercial bank borrowing adversely, was in continuation of the fiscal measures towards tightening the monetary policy. According to SBP data, the current account deficit of Pakistan has slightly shrunk to US $7.983 billion in the first six months of the current fiscal year 2018-19, as compared to $8.353 billion in the corresponding period of the last fiscal year. The deficit in the first six months remained at 5.4 percent of the Gross Domestic Product (GDP). The fiscal measures have started bearing fruit as the balance of trade situation has improved. According to government data, the trade deficit has shrunk by 5 percent from US $17.7 billion in July-December 2017 to US $16.8 billion in the corresponding period in 2018. The impact of devaluation on the country’s exports is not felt immediately. However, this impact can be measured in terms of volume but not in terms of the value, which would be reflected later. “Imported goods have become costly due to devaluation,” says a senior banker, Dr. Shahid Hasan Siddiqui, Chairman of Research Institute of Islamic Banking and Finance. He says Pakistan is an import-based economy in which import of fuel is the main item, which sucks the big chunk of foreign exchange. Exports from Pakistan are not increasing with the same proportion. Recently, the international rating agency Standard and Poor’s (S&P) has lowered Pakistan’s credit rating from B to B negative due to poor economy. The ruling PTI has been blaming former Pakistan Muslim League-N government for putting a cap on the exchange rate, which affected the country’s exports. The imports prices also remained at the same level, but due to local inflation, the prices of oil remained higher. The other major measures announced by the government of Prime Minister Imran Khan to improve the economy included massive devaluation of Pakistani currency on November 30 and announcement of a mini-budget on January 23, 2019, adjusting tax rates. Currency devaluation is a solution for reducing the current account deficit as overvalued rupee makes exports expensive and imports cheaper. Dr Shahid Siddiqui questions the 100-day performance of the present government. He says the PTI had promised to bring equitable taxation policy, but all the economic measures, including mini budgets, have go against the claims. He says all income should be taxable. Similarly, he says whitening of the black money should be stopped, but the government in the mini-budget has provided incentives for whitening of the black money. “All sections of the society would benefit from amendment in Section 123 of Income Tax Ordinance,” he adds. The present government has also failed to control prices. “The federal government increased the Sui gas rates by over 143 percent in September, 2018, which has affected every section of the society as well as impacted on prices of other commodities. Similarly, price of electricity has also increased,” he adds. All these tough economic measures are said to be preparations for getting a bailout package from the International Monetary Fund (IMF), which has still not been materialised. Although the size of the IMF bailout package is still unknown, further tough economic measures are expected to be announced in the next budget to meet IMF conditionalities. The government has formally applied for an IMF loan. A mission of the lender had also visited Islamabad to finalise the deal. IMF may approve the loan by July 2019, after the start of new financial year. Federal Finance Minister, Asad Umer, has hinted that negotiations with IMF for a bailout package are at an advance stage and the loan would be approved very soon. Also read: Slow and (un)steady Dr. Kaiser Bengali, senior economist, who remained Advisor to Chief Ministers Sindh and Balochistan, says “whether you buy one billion dollars or 10 billion dollars the conditionalities of IMF remain the same.” Pakistan has so far received around US $2 billion as friendly financial support from brotherly Muslim countries — Saudi Arabia and the United Arab Emirates. In October, Saudi Arabia had announced to give US $6 billion package to Pakistan, which included half as balance of payment support and the remaining as deferred payment on oil purchases. A similar package worth US $3 million was also announced by the UAE. “Pakistan has so far postponed the economic crisis with the help of the Gulf countries,” remarks Dr. Siddiqui. [post_title] => Desperate measures [post_excerpt] => [post_status] => publish [comment_status] => open [ping_status] => open [post_password] => [post_name] => desperate-measures-2 [to_ping] => [pinged] => [post_modified] => 2019-02-10 01:58:46 [post_modified_gmt] => 2019-02-09 20:58:46 [post_content_filtered] => [post_parent] => 0 [guid] => http://tns.thenews.com.pk/?p=95250 [menu_order] => 0 [post_type] => post [post_mime_type] => [comment_count] => 0 [filter] => raw [format_content] => ) [3] => WP_Post Object ( [ID] => 95254 [post_author] => 29 [post_date] => 2019-02-10 03:20:50 [post_date_gmt] => 2019-02-09 22:20:50 [post_content] => There is a constant slowing down of the economy, caused primarily by low output of the manufacturing and agricultural sectors. The cost of doing business and producing industrial and agricultural products has spiraled up, causing the prices to go up. Over the years, the cost of energy has gone up. Likewise, the price of imported raw material used by the manufacturing sector has increased too mainly due to continuous rupee devaluation. Similarly, the agricultural sector has to incur heavy input costs in the form of imported fertilisers, pesticides, seeds, raw material, etc, amid major crop failures. Low agricultural yield per acre, lack of research in the sector, archaic methods of farming, dependence on imported seeds and shortage of irrigation water are some of the reasons why the agriculture sector has under-performed over the years. This has had an adverse impact on the agro-based industry like textile and leather. The State Bank of Pakistan, in a move to curtail government borrowing, encourage savings and control demand, has increased the policy interest rate to 10.25 per cent. This will increase both the rates of interest charged by lending banks from borrowers and that offered to those who deposit money in savings accounts. The rationale of this move is that due to less borrowing and more savings, the circulation of money in the market comes down and helps control inflation. But this has led to concerns among the business community which considers it an anti-investment move because businessmen say seeking expensive loans does not suit investors as well as those who want to modernise their industrial units according to the needs of the day. In fact, high interest rate has added to the woes of businesses that were complaining about the negative impacts of rupee devaluation. Different local and global organisations and rating entities have predicted a low GDP growth in the current fiscal year, putting it to be around 4 percent to 4.5 per cent, much below the earlier growth rate target of 6.2 per cent. The Federation of Pakistan Chambers of Commerce & Industry (FPCCI) President, Daroo Khan Achakzai, points out that large-scale manufacturing has seen slow growth and sectors like textile, food and beverages, pharmaceuticals, electronics, etc., have suffered the most. He says increase in interest rate will prove counter-productive. He believes interest rate should be brought down to promote private sector investment. “The government must explore venues to create fiscal space for itself rather than borrowing heavily from the SBP and leading to rise in inflation.” Though it is commonly believed that rupee devaluation has contributed to increase in inflation, economist Kaiser Bengali thinks otherwise. He says the impact of rupee devaluation is not yet there because it generally comes with a lag. “Once that happens, it is feared the rate of inflation will further increase.” Bengali also terms excessive government borrowing from the SBP a major cause of inflation because this increases circulation of money in the market without actual growth. “The SBP prints money for lending and the government spends heavily on non-development sector, infrastructure, payment of salaries, etc., which increases the supply of money. When money is abundant, the demand for goods and services rises in the presence of limited supply and that results in inflation.” Bengali points out that Pakistan’s industry, including the export-oriented one, is heavily dependent on imports and lately the raw material, like cotton, is also being imported. “The export industry imports accessories, chemicals, additives, etc., for use in the products it sends abroad. It is quite understandable that when inputs, including oil, are imported the impact of dollar appreciation is bound to have a negative impact,” he adds. The government, he believes, must realise that the loans obtained by the industry on higher interest rates will further push the input costs up. He suggests the government must focus on promoting agriculture and increasing supply of food and agricultural products through supportive policies and modern research as their shortage leads to inflation. “At the same time, there should be a mechanism to fill the demand-supply gap through the year because prices keep on fluctuating between extremes. At one time tomatoes are available for Rs20 per kg and at other for Rs200 per kg.” Some budgetary measures have also had a negative impact on large-scale manufacturing sector. The automobile sector can be cited here. A representative of the sector says the imposition of ban on purchase of new cars by non-filers has hurt their sales while production has come down drastically. The industry, he says, installed assembly plants with extended capacity to meet the existing demand but the decision of the government affected the demand side, thus making investment on expansion redundant. “The Federal Board of Revenue (FBR) is forwarded details of each and every new car buyer; so it must question them about filing tax rather than crippling the industry.” The government has recently allowed the non-filers to purchase new cars up to 1300 cc engine capacity which, in his opinion, will benefit a particular assembler only. All Pakistan Textile Mills Association (APTMA) Secretary, Anis ul Haq, says both the high interest rate and rupee devaluation directly impact the textile industry that has been planning to import modern machinery. “The increasing cost has led many to rethink and wait for a proper time.” Haq says the government has offered them incentives like provision of electricity and gas at competitive rates which will help them bring down the cost to some extent. Also read: The cost for consumer He says tax refunds worth billions are payable to exporters by the government. If these are released, as hinted by the government, the industry will get working capital it needs desperately at the moment. He says issues of large-scale industry and small and medium-scale are the same because they are part of the same value chain and cannot work in isolation. Gohar Majeed, a chartered accountant and director at Trust Deals — a real estate advisory and development company — believes the manufacturing sector will see a revival as the huge amount of money parked in the real estate sector is being withdrawn by investors. “After restructuring of the real estate sector, investments will offer modest returns in this sector. Many industrialists who had invested their money in the real estate sector will now divert it from there and concentrate on production and boosting exports,” he adds. [post_title] => Slow and (un)steady [post_excerpt] => [post_status] => publish [comment_status] => open [ping_status] => open [post_password] => [post_name] => slow-unsteady [to_ping] => [pinged] => [post_modified] => 2019-02-10 01:58:51 [post_modified_gmt] => 2019-02-09 20:58:51 [post_content_filtered] => [post_parent] => 0 [guid] => http://tns.thenews.com.pk/?p=95254 [menu_order] => 0 [post_type] => post [post_mime_type] => [comment_count] => 0 [filter] => raw [format_content] => ) [4] => WP_Post Object ( [ID] => 95248 [post_author] => 29 [post_date] => 2019-02-10 03:18:00 [post_date_gmt] => 2019-02-09 22:18:00 [post_content] => “What has hit me and my family most is the price of milk and sugar going up in the last two years,” says Zainab Bibi who hails from Mailsi district in South of Punjab. She and her husband moved to Karachi a few years ago in search of a better standard of living. But for Zainab, an avid tea drinker whose staple diet continues to be chaai paratha, it is not easy surviving in Karachi as items that make up her sticky sweet tea are pricier than in her village. “One reason I came here is that I want to save enough to build two rooms in my village, my own home. But the price per 1000 red bricks has risen from Rs5000 to Rs8000 within two years.” In contrast to Zainab’s economic challenges, the challenge of Samiya Khan (name changed), a resident of the uptown Defence area in Karachi is different. “You are asking the wrong person. I honestly have not felt the pinch as my husband just gives me his card; I go to the supermarket and swipe it to pay without even checking the prices minutely. But if at all, I would say the prices of imported food items have gone up. The chocolate spread my children love eating and I use for baking cupcakes has gone up from Rs280 to Rs450. However, I don’t think prices have gone up that much. Have they?” she says. Prices of consumer goods, utilities and luxury items going up is never taken lightly. But which prices affect which strata of society is the key to understanding how closely linked income inequality and inflation are. Pakistan’s annual inflation rate rose to 7.2 percent in January of 2019 from 6.17 percent in the previous month. It was the highest inflation rate since September of 2014, as shared by Trading Economics. According to the State Bank of Pakistan’s website, Headline CPI (Consumer Price Index) inflation (2007-08=100) was recorded at a level of 6.2 percent on year-on-year basis in December 2018 as compared to 4.6 percent during corresponding month of last year. According to data shared by Pakistan Bureau of Statistics (PBS), January 2019 saw an increase in prices of items like sugar, fresh fruits, pulses and tomatoes, but also saw a decrease in the prices of chicken (by 18.06 percent), eggs, onions and potatoes. But for Zainab Bibi, all this does not translate into a major change, and the one underlying take home message she has in her mind is simple — A good life in Naya Pakistan is as unaffordable as purana Pakistan, even though fuel prices have gone down although electricity prices have gone up if compared between December 2018 and January 2019. For the bourgeois and the patricians of Pakistan, their reaction to inflation is as different as is their lifestyle when compared to the struggling lower middle class or the yet lower strata on the economic ladder. When asked which household needs had taken a dent due to inflation in Pakistan, the elite is often found themselves confused between needs and wants, and often complain of how luxury spending has been affected. [box type="shadow" align="alignright" class="red_lines" ]It is not that the well-off people do not get impacted by inflation. The price of fuel affects the prices of water tankers for the upper tier. When this happens, their lush lawns become parched, they stop washing their car porches frequently.[/box] Over lavish high-teas, the conversations often include how the price of air travel has gone up, and vacations are becoming pricier. Delve deeper and the falling rate of the Pak rupee has affected how they will pay the fee of their children studying abroad in dollars and pounds. “I am very happy actually; my children’s school fee has been considerably reduced since the new government came in,” says a young mother whose two children are students at an upper tier school in Karachi. What varies is the pinch someone feels when prices go up, depending on affordability. The theory of relativity may then not be applicable only to laws of physics, neutrons and black holes. How every Pakistani experiences inflation is in relation with how much they can afford, their spending habits, and their bank statement, if they have a bank account, that is. Yet one strata feeling the hit of inflation does spill over to the other strata as well. When a darzi (tailor) increases the rate of a female shalwar kameez, the pinch is felt by all, but few join the dots that the cost of commute of the tailor and his assistants has gone up because petrol is pricey. The ticket for a bus traveller, the fare for a rikshaw commuter, or the cost of fuel for someone who goes on a motorbike — all go up. Consequently, so do the prices of general household items. Also read: Editorial It is not that the well-off people do not get impacted by inflation. The price of fuel affects the prices of water tankers for the upper tier. When this happens, their lush lawns become comparatively parched, they stop washing their car porches frequently, and they opt for ‘made in Pakistan’ semi-automatic washing machines to save water. If fuel is pricier, one thinks twice before opting for the generator during long sultry hours of load shedding, and opts for the UPS. And if electricity rates climb up, the use of air conditioners has to be well thought-out. Last if not the least, climbing rates of gas means affluent Pakistanis are actually considering opting for smaller water-heater geysers that can be easily put on and off as and when needed. But for those who have to start worrying about the prices of potatoes and ghee, and have far too many mouths to feed but way too less earning hands, inflation is a bad word. It is time those on top of the food chain let some resources trickle down to make life easier for all. We may not be able to reduce inflation, but maybe we can somewhat reduce the widening economic inequality. [post_title] => The cost for consumer [post_excerpt] => [post_status] => publish [comment_status] => open [ping_status] => open [post_password] => [post_name] => cost-consumer [to_ping] => [pinged] => [post_modified] => 2019-02-10 01:58:39 [post_modified_gmt] => 2019-02-09 20:58:39 [post_content_filtered] => [post_parent] => 0 [guid] => http://tns.thenews.com.pk/?p=95248 [menu_order] => 0 [post_type] => post [post_mime_type] => [comment_count] => 0 [filter] => raw [format_content] => ) [5] => WP_Post Object ( [ID] => 95246 [post_author] => 29 [post_date] => 2019-02-10 03:16:24 [post_date_gmt] => 2019-02-09 22:16:24 [post_content] => Early this month the Pakistan Bureau of Statistics (PBS) announced the rate of inflation for the month of January to be at 7.2 percent — the highest in the last four years. Obviously, that set the alarm bells ringing, with government officials and independent economists explaining the figure in their own way. But what does inflation mean to the common man? Simply put, it means items of daily use, especially food items, become dearer. How inflation can be controlled is something for which he looks up to the government for an answer. Hardcore economics is not a layman’s area of interest, inflated bills are. Since this government came into power last year riding on the slogan of tabdeeli (change), the common man has been expecting a change for the better in their lives but so far his expectations have not been met. The prices of items of daily consumption — ghee, sugar, milk, flour, etc. — have instead gone up; thus, lending weight to the perception that this government has been unable so far to steer the economy out of the difficult situation, or at least put it in the right direction. Broadly speaking, the twin deficits — fiscal and current account — remain a huge challenge. Also read: Inflation ascendant While the SBP tightens the monetary policy by increasing the interest rates and the government seeks friendly countries’ help to ease down the stress on economy, these short term measures show the government in a panic mode. Tightening the monetary policy by the SBP does not go well with large-scale manufacturers as well. The rationale given for the increase in the policy interest rate by the SBP to 10.25 percent is that due to less borrowing and more savings, the circulation of money in the market will come down and help control inflation. But the business community considers it an anti-investment move; expensive loans do not lure investors. So, what is the way out? As senior economist, Dr Nadeem Ul Haq puts it, Prime Minister Imran Khan should reform the governance structure “from colonial command and extraction to a modern thoughtful, decentralised, professional and non-politicised”. [post_title] => Editorial [post_excerpt] => [post_status] => publish [comment_status] => open [ping_status] => open [post_password] => [post_name] => editorial-166 [to_ping] => [pinged] => [post_modified] => 2019-02-10 01:58:03 [post_modified_gmt] => 2019-02-09 20:58:03 [post_content_filtered] => [post_parent] => 0 [guid] => http://tns.thenews.com.pk/?p=95246 [menu_order] => 0 [post_type] => post [post_mime_type] => [comment_count] => 0 [filter] => raw [format_content] => ) ) [post_count] => 6 [current_post] => -1 [in_the_loop] => [post] => WP_Post Object ( [ID] => 95243 [post_author] => 29 [post_date] => 2019-02-10 03:24:18 [post_date_gmt] => 2019-02-09 22:24:18 [post_content] => On Friday February 1, Pakistan Bureau of Statistics (PBS), the official source of information on inflation measured by the Consumer Price Index (CPI), announced the rate of inflation for the month of January. It does that on the first day of every month. The latest announcement, however, set the alarm bells ringing as inflation touched 7.2 percent, the highest in the last four years. While restraining individual price hikes is a matter for various levels of government, controlling inflation is the responsibility of the State Bank of Pakistan (SBP). Monetary policy is the tool in its hands. A day before the PBS announcement, Monetary Policy Committee (MPC) of the SBP met and decided to increase the policy rate from 10 to 10.25 percent, or by a mere 25 bps. The question is: Would the MPC decision have been the same, had it waited for another day? While the CPI information is always made available at the start of the month, the MPC does not have to meet on the last day of the month. In the past, it has been meeting in the middle of the months and other dates. It should have full information before it. On January 31, the information considered by the MPC for average headline CPI inflation was for six months, which stood at 6 percent, “considerably higher than the 3.8 percent recorded during the same period last year.” Now it is 6.21 percent against 3.85 percent. It was also noted that “headline YoY inflation has shown some moderation during the last two months.” The moderation has given way to a jump to 7.2 percent in January. The only concern was “core inflation as measured by non-food-non-energy components of the CPI basket” reaching 8.4 percent in December 2018. The core concern is up at 8.7 percent. On the whole, it was concluded that “the projected range of inflation remains unchanged at 6.5 to 7.5 percent.” The top of the range is approaching fast. In the last fiscal year, average headline inflation at 3.8 percent remained lower than the SBP’s target of 6 percent. In the current year, inflation is threatening to beat the SBP’s projections. Both headline and core inflation are entering the red zone. De-composition of the headline inflation of 7.2 percent reveals that the highest increases are the result of official policy. Non-perishable food items have the highest weight of 29.84 in the CPI. Most of these items have become expensive due to the massive devaluation of the rupee. Out of 7.2 percent increase in headline inflation, this group contributed 1.48 percentage points. Housing, water, electricity, gas and fuels group has the next highest weight of 29.41 percent.The group contributed 3.13 percentage points to the headline inflation. Gas prices were first hiked to demonstrate the hard stance of the government towards subsidies and losses. As the harsh winter set in, the bills ballooned, in some cases, larger than house rents. Now the government is inquiring into why it did what it did. Gas price shot up by 85.31 percent. Other increases in the group were also in double-digit: Motor fuel (18.05 percent), kerosene oil (16.14 percent), water supply (12.94 percent). Electricity price rose by 8.48 percent, but the recent proposals to increase tariff will impact upon the headline inflation in February. House rents increased by 8.2 percent. Related to rising fuel cost, transport contributed 0.89 percentage points to the headline inflation, the third highest, with an increase of 15.22 percent. Sensitive Price Indicator (SPI) is a subset of CPI, consisting of 53 essential items. Before the PTI government was installed, the SPI suddenly rose from 0.5 percent in May to 1.9 percent in June and went up to 3.6 percent in July. It started to decline thereafter as the new government raised expectations of a better future in its honeymoon period. The SPI was 3.3 percent in August, fell to one percent in September, but started to increase again since October. By January, it stood as high as 3.7 percent. This is for the lowest income quintile. For all five quintiles, the SPI in January is 6.67 percent, closely following the headline CPI. [box type="shadow" align="alignright" class="red_lines" ]To reduce its cost of borrowing, the ministry of finance has retired its commercial bank debt by borrowing from the SBP. This is classic printing of currency notes providing fuel to inflation. Credit to private sector, as a result, has seen some boost, but not to fixed investment that has actually declined.[/box] On a weekly basis, the situation is much worse. For the week ending on January 31, 2019, the SPI was 5.26 percent for the lowest income quintile and 8.89 percent for all quintiles combined. It seems that the SBP was caught up in the battle of macroeconomic frameworks between the Ministry of Finance and the Planning Commission. Traditionally, the Planning Commission pushes for growth and, therefore, cares less for inflation. The Ministry of Finance claims to stand for stability, but is hungry for resources to meet its current expenditure. This it does by curtailing development expenditure. And this is what happened at the meeting of the Monetary and Fiscal Coordination Board, held the day before the MPC meeting. In theory, the SBP is independent in its decision-making. In effect, this board, provided in SBP law and chaired by the finance minister and membered by planning and commerce ministers, besides two independent professionals and the governor, is the arena to coordinate economic policies. This concourse signaled the beginning of the end of doom and gloom in the wake of the inflows from friends and the “no need to go the IMF” mantra. A higher interest rate would tarnish this feel-good message. The MPC, not exactly a collection of experts in the monetary field, decided to lie low. It played safe by announcing a marginal increase in the policy rate, but was able to not fall fully in line to go for no change or a marginal decrease. The trouble is that the twin deficits, fiscal and current account, that are the main sources of rising demand pressure, continue to be problematic. While the FBR was falling way behind the first mini budget targets, the second mini budget dole-outs to the rich and the powerful have dug another hole in the revenues. What was billed as a reform package said nothing about getting rid of the deadweight called the FBR. Also read: “The economy is not a political enterprise” To reduce its cost of borrowing, the ministry of finance has retired its commercial bank debt by borrowing from the SBP. This is classic printing of currency notes providing maximum fuel to inflation. Credit to private sector, as a result, has seen some boost, but not to fixed investment that has actually declined. In the case of current account deficit, the competitive edge provided by rupee depreciation is being eroded by the rising domestic inflation. Uncertainty, inconsistent decision-making, bureaucratic inertia, gloomy outlook for agriculture, negative growth of large-scale manufacturing in the July-November period and state borrowing from the SBP are leading to the nightmare of too much money chasing too few goods. Deliberate inflation creating jobs may be tolerable, but the present inflation, in the words of a French economist, “consists of subsidising expenditures that give no returns with money that does not exist.” [post_title] => Inflation ascendant [post_excerpt] => [post_status] => publish [comment_status] => open [ping_status] => open [post_password] => [post_name] => inflation-ascendant [to_ping] => [pinged] => [post_modified] => 2019-02-10 01:59:03 [post_modified_gmt] => 2019-02-09 20:59:03 [post_content_filtered] => [post_parent] => 0 [guid] => http://tns.thenews.com.pk/?p=95243 [menu_order] => 0 [post_type] => post [post_mime_type] => [comment_count] => 0 [filter] => raw [format_content] => ) [comment_count] => 0 [current_comment] => -1 [found_posts] => 6 [max_num_pages] => 1 [max_num_comment_pages] => 0 [is_single] => [is_preview] => [is_page] => [is_archive] => 1 [is_date] => [is_year] => [is_month] => [is_day] => [is_time] => [is_author] => [is_category] => 1 [is_tag] => [is_tax] => [is_search] => [is_feed] => [is_comment_feed] => [is_trackback] => [is_home] => [is_404] => [is_comments_popup] => [is_paged] => [is_admin] => [is_attachment] => [is_singular] => [is_robots] => [is_posts_page] => [is_post_type_archive] => [query_vars_hash] => db1169c0b02392f7845b184a6030aa64 [query_vars_changed] => 1 [thumbnails_cached] => )Dr Pervez Tahir February 10, 2019 Leave a comment
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For the bourgeois and the patricians of Pakistan, their reaction to inflation is as different as is their lifestyle
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