Keeping prices in check

Of the innumerable economic problems Pakistan is currently facing, by far the most pressing may be double-digit inflation. Latest figures show a rise in prices of over 13 per cent in May, as compared to the same period last year. Inflation can be acceptable, even necessary, when it is accompanied by equal or greater economic growth. That, however, is not the case in Pakistan, where economic growth remains sluggish. What we are experiencing is an extreme case of stagflation, one that requires austerity to get through. The first thing the government needs to do is reduce inflation by reducing central bank financing. Since the PPP-led government came into power, it has relied on borrowing from the central bank, which in turn prints more money. The last figures available, for July 2010-January 2011, show that the government borrowed Rs120 billion from the central bank and a further Rs217 billion from private banks. The only way to reduce this borrowing is by tightening the federal budget and reducing the deficit. The government also needs to replace borrowing with increased revenue, in the form of better tax collection.

There is a danger, however, that the government will try to balance the budget on the backs of the poor, who are already hardest hit by spiralling inflation. Cutting welfare programmes, as the government is seeking to do with the Benazir Income Support Programme, will only further shift the burden towards the poor. Already, thanks to IMF dictates, subsidies for food and power have been slashed. Instead, the government should offer targeted incentives to the agricultural sector to ensure a steady supply of food. Equally importantly, there needs to be an end to power breakdowns so that industry can work to its full potential. Electricity prices are skyrocketing but they are not being matched with constant supply. Any chances of economic recovery are being hampered by the law and order situation and the costs associated with flood relief. Loadshedding that lasts longer than even 10 hours a day is a further impediment.

Published in The Express Tribune, June 14^th, 2011.