The rise and rise in inflation

Pakistan has been caught in an inflationary spiral, having a daunting double-digit inflation rate currently averaging 10.9% as against the recommended 2-3%. Being a net importer of energy – and now food as well – Pakistan faces price fluctuation which fuels inflation. In a country relying on imports, the cost of raw materials does undergo frequent ups and downs. The idea of importing food seems strange in case of Pakistan which is primarily an agricultural country. However, a serious lack of focus over the years on the agriculture sector has brought the country to such a pass where even wheat is being imported.

Pakistan’s oil purchases from abroad weigh heavily on its total import bill. An increase in global oil prices not only leads to inflation but also puts downward pressure on exchange rate, making imports more expensive, thus causing a trade deficit. Exchange rate adjustments, government-administered prices, escalation in indirect taxes, and inflationary expectations all affect the existing rate of inflation.

All this, paired with the fluctuations in money supply, adds fuel to the fire of inflation. Since Pakistan receives foreign remittances as well as aid and loans from abroad, there is an increase in the money supply. Furthermore, the State Bank of Pakistan reduced the interest rate from 13.25% in March 2020 to 7% in June 2020 to persist till date. This fall in the central bank’s policy rate would, in theory, increase consumption and investment expenditure in the economy, causing a rise in the aggregate demand. The subsequent increase in aggregate demand leads to growing inflationary pressures in the economy.

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The Federal Budget 2021-22 has set the FBR’s tax collection target at Rs5,829 billion which is approximately 17.5% higher than last year's Rs4,963 billion. The ratio of direct taxes in the targeted tax amount has been reduced in the new budget which is perplexing as it is progressive in nature. The increase in the tax collection is over-reliant on indirect taxes which are regressive in nature. The target for indirect taxes has been increased by Rs727 billion to Rs3,647 billion in FY22 as compared to last year's Rs2,920 billion. This is bound to increase inflation, adding to the burden of the common man as these taxes include custom duty, sales taxes and federal excise duty. Besides, the government has also to collect Rs610 billion from petroleum development levy during the ongoing fiscal year, in line with the IMF’s demands. This levy, coupled with an unstable import price of oil, cannot go without causing a rise in inflation, especially because it will raise transport charges which will, in turn, make the transported goods as well as electricity dearer. That the rise in power tariff adds to the cost of production goes without saying.

The Budget 21-22 targets rapid economic growth but has neglected the fact that such an ambitious target would lead to upward pressures on prices and wages, leading to higher inflation rates. There also seems to be endless promises and word play – such as ‘no new taxes’ – in the budget speech by Finance Minister Shaukat Tarin. Whereas the fact is that the increasing regressive nature of the taxes is hardly pro-poor. The negligence towards holding the undocumented economy accountable in the form of direct taxes is vivid. However, the increase in the indirect taxes not only give way to rising prices but also continue to depreciate the living standards of the common man and widen the income disparity.

To worsen the situation for the members of the working class, inflation does not equally affect all income groups. It is the purchasing power of fixed income earners as well as creditor which is substantially curtailed. In time the economy may see many adverse effects of inflation such as unemployment, sick businesses, etc. The government’s future success may still be seen by their use of anti-inflationary policies and their efficiency.