Inflationary cycles

Published: November 5, 2018

Pakistan has entered a debilitating inflationary cycle on the back of a higher than anticipated rise in global oil prices, an upward revision in domestic oil and gas prices as well as increases in power tariffs, a further rise in regulatory duties on imports and continuing second round impact of previous exchange rate depreciations with the rupee.

Foreign exchange reserves have almost bottomed off. Current account and fiscal deficits have gotten out of hand. And debt repayments have outpaced our annual budgetary capacity. The core inflation has increased to a four-year high of 8.2% while the headline inflation has gone up 7%, again a rate estimated to be highest in four years. The current cycle of inflation is likely to take years to slow down. But before that happens the rate is expected to reach 14% by the middle of next fiscal year, according to the multilateral banking sector.

The need of the hour, therefore, is to use the anticipated bailout packages from friendly countries and the IMF to restore macroeconomic stability which in turn would prevent the rate from galloping away. The SBP as expected has already announced a raise of 100 basis points in interest rate that rose to a 44-month high at 8.5% keeping slightly ahead of the inflation rate. Since inflation erodes purchasing power per unit of currency the poor and the indigent suffer the most. It also hurts those who earn a salary or live on a fixed income. Savings, particularly those kept in cash, lose value.

The rich pull cash out of even banks and investments and turn it into tangible objects that hold their worth. Investment-based income, however, tends to flourish during cycles of inflation, as market returns are often one of the first sectors that reflect escalating prices.

Sufficient inflation serves to reduce foreign investment because inflationary cycles make an economy seem less reliable. Moreover, investors worry about their own investment, and whether it will ultimately suffer from the same devaluation.

Published in The Express Tribune, November 5th, 2018.

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