Stagflation and commodity speculation

In absence of profitable opportunity in real estate, capitalists speculate in commodities

PHOTO: file

LAHORE:

The economy is experiencing high inflation along with stagnant output growth. This complex situation has created political upheaval and discontentment in the country. There are multidimensional factors associated with this situation.

The economy is constrained by the balance of payments (BOP) where imports grow faster than exports. In an import-dependent economy, dearth of foreign exchange has compelled the government to put curbs on imports.

These curbs have forced importers to re-align and re-plan their import orders. On this basis, industrial capitalists have brought down their capacity utilisation to around 50% since they are unable to get raw materials and intermediate goods in a timely manner.

The import curbs and restrictions, though necessary under the emerging conditions, have impacted the economy a great deal. Most of the informal business firms have shed their employees to save on their costs while formal large businesses have either adopted the rotation scheme for their labour or temporarily relieved the labour.

Small business firms are facing increasing costs which are affecting their profitability. This implies that the unemployment rate is increasing along with high disguised unemployment which, in turn, reduces demand for products.

When demand is not forthcoming, business firms scale down capacity utilisation and invest their capital either in the real estate sector or the financial sector or maintain cash holdings.

The real estate market has been slowing down since November 2021. There is hardly any opportunity of speculative trade and capital gain left in the market.

By sitting on cash, capitalists look for profitable opportunities. In the absence of profitable opportunity in the real estate market, they started to speculate in commodities like wheat, corn, potato, etc.

For instance, potato is a cash crop which has reduced the cultivated area of wheat in the last couple of years.

In the absence of any reliable statistics and guidance, when farmers saw that potato crop gave reasonable returns in 2022, they preferred to cultivate potato instead of wheat. As a result, a slight surplus crop of potato is being obtained in 2023.

Since there is a shortage of foreign exchange in the country, traders started to export potato to Afghanistan, Central Asian states and the Middle Eastern countries to some extent to fetch precious foreign exchange for the country.

In the meanwhile, domestic speculators pounced at the opportunity and started to park their money in the finished produce. As a result, prices of potato jumped in a short span of time.

These speculators even knew that the government is not in a position to import potato owing to the tight foreign exchange situation. Now the consumers are getting potato at a higher price.

Similarly, the government has fixed the support price of wheat at Rs3,900 per 40 kg. The price was jacked up owing to the devaluation of Pakistani rupee in order to reduce the gap with the international price.

As the new crop arrived, the speculators jacked up the price of wheat to around Rs5,000 by disseminating news that the wheat crop is in short supply, target of wheat would not be achieved this year and the price would reach Rs6,000 in a short span of time.

Then the government announced that it is going to import wheat in a couple of months. The mere announcement brought the price of wheat down to around Rs4,000 as the speculators brought their stocks in the market and even sold the holdings to some extent.

In short, speculation is rife in the country and speculators are moving their capital from one commodity to the other to get quick gains.

The excess of domestic finance is contributing to speculation. Commodity speculation is also contributing to stagflation. Hence, the challenge for the government is acute in the months to come.

The writer worked at SDSB, Lahore University of Management Sciences (LUMS)

 

 

Published in The Express Tribune, June 12th, 2023.

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