Escalation matter

Pakistan’s inflation, as measured by the consumer price index (CPI), reached a 47-year high of 27.3% in August 2022, the highest since May 1975; the entire impact of catastrophic flooding on the prices of food and other commodities has yet to be factored in. From 1957 to 2022, the CPI inflation rate averaged 7.94%, with a high of 37.8 per cent in December 1973 and a low of negative 10.32 per cent in February 1959. When it came to dealing with all-time high inflation, the State Bank of Pakistan (SBP) took a penknife to a firefight. The country’s poverty map has been redesigned as a result of its tampering with the economy’s monetary policies and botching the one job it was entrusted with. The bad news is that consumer inflation has not yet peaked. To be fair, the true heroes of the IMF rescue are the people. We were not forced to sell our economic sovereignty with the IMF in order to prevent a default and mobilise further inflows. Because the purpose of the economic team was to create a default-free Pakistan for this government to rule, the scared administration quickly did what the Fund wanted of it without any intelligent opposition. What devastating human tragedy would result from this completely self-serving and politically motivated approach was not even on their radar. The effects were far from pleasant. Millions of medium and lower-income households fell into poverty. It’s difficult to determine what may have been done differently in these areas to avoid the current inflationary situation. Subsidies for energy had to disappear. The government had no control over oil prices and could do nothing to wean the economy off of costly fossil fuels. The external climate is also unfavourable, with all major economies experiencing decades-high inflation rates. The rupee’s recent decline has further overwhelmed our economy, boosting the import bill and resulting in high imported inflation. Agriculture, on the other hand, is an area where we could and should have done far better. In any event, the short and long of it is that it is comprehensible why inflation is so high at this time of year. Now is perhaps a good time to warn policymakers that public sentiment toward inflation in general, and food inflation in particular, is reaching a tipping point. The central bank expects headline inflation to peak in the July-September quarter before declining for the remainder of the fiscal year. That no longer seemed plausible, given the inflationary impact of the floods that have wiped out crops and food stores, the entire extent of which has yet to be determined. The government must resist the desire to gain favour by importing food from India via triangle commerce from the UAE, which achieves little more than price inflation. With our citizens already facing sky-high inflation, there is a lot to be gained by importing potatoes, tomatoes, onions, and, most likely, wheat from India on the cheap. Strengthening safety nets is critical at this time, and the government will almost certainly redirect significant more resources to the Benazir Income Support Programme. This, however, is unlikely to be sufficient, given how inflation and unemployment are forcing an increasing number of people into poverty. Under these conditions, staying on budget for the current fiscal year – as required by the government’s IMF agreement – may no longer be feasible.