Rising inflation, falling aid

The government is relying on an increased flow of aid — post-flood — to help it deal with its fiscal pressures.

Predictions of the sensitive price index (SPI), combined with the wholesale price index (WPI), have been steadily increasing. The Federal Bureau of Statistics releases the figures every month. This past week, the rise in the SPI came out to 17 per cent. Unto itself, this number would not mean much expect that for the past few months, the WPI and SPI have been higher than the consumer price index, the headline measure for inflation. This means that inflation is expected to rise and — given the magnitude of the divergence between the CPI and the leading indicators — to rise quite substantially. The State Bank, whose primary task is to fight inflation, has identified the excessive fiscal deficit as the chief culprit behind rising inflation and has been crying hoarse trying to get the government to stop its fiscal profligacy. The finance ministry, for its part, appears to have woken up to the theoretical consequences of its actions, though they do not yet seem to have felt the urgency of actually doing anything about the gaping fiscal deficit just yet.

It seems that instead of coming up with a structural solution to a clearly chronic problem the government is instead relying on an increased flow of aid — post-flood — to help it deal with its fiscal pressures. If this is the case, then we wonder how they would treat the news that the Asian Development Bank’s flood relief package consists of a diversion of existing aid packages rather than any new aid flows. International donors have made it abundantly clear that they are tired of constantly having to bail out Pakistan. For our part, it would behove our government to stop relying on the narcotic that is foreign aid and instead focus on expanding the tax base and contracting the size of government. Otherwise, the crippling burden of inflation will keep on destroying the incomes of the poor.

Published in The Express Tribune, September 9^th, 2010.