Inflation, mismanagement and vulnerability

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Dr Samina Sabir

A persistent increase in the general price level is coined as inflation. Imagine that you are spending more than half of your income on food and non-food items whose prices abruptly increase significantly. This is how inflation hits the poor in a developing country like Pakistan where 87 million (26 percent of the population) people are living in poverty, and COVID -19 coupled with low economic performance has tugged more people below the poverty line. Inflated prices are just like a tax on low-income households and it has further mounting impact on poverty. Therefore the price hike is suppressing the purchasing power of the consumers and particularly, it hits hard the lower segment of the society. Rising prices are also badly impacting government employees. Their salaries have not been increased in budget 2020-2021 owing to the COVID-19 pandemic but prices of everything have gone up and up. It is the sole responsibility of the government to maintain and sustain affordable prices of the commodities keeping in view the unemployment rate, income level and particularly the high proportion of poor in total population.
The monthly inflation data released by the Federal Bureau of Statistics of Pakistan reveals that prices of food items have increased in September 2020 and it has also surged the general price level. For instance, the consumer price index (CPI) general has increased by nine per cent on year to year basis in September 2020 as compared to an increase of 8.2 percent in August 2020 while 11.4 percent in September 2019.Therefore, low-income households tend to spend a large share of their income on staple food items, making them potentially vulnerable to food price increases. Since Ramadan, food prices have been soaring, for instance, the prices of wheat and sugar, due to hoarding and artificial shortage created by suppliers act like the mafia and the government is unable to tackle them. Currently, there is a shortage of three million tons of wheat in Pakistan that will put further pressure on its price.
Moreover, the monthly and weekly prices of perishable items are multitudinously fluctuating. Several factors are merely causing the inflationary spiral of food items; seasonal factors, increase in transportation cost owing to an increase in oil prices, and disruption in the supply chain due to delayed decisions on ensuring the availability of commodities in the domestic market.
Miserably government has increased the prices of medicines to curtail their shortage and again this is not a sustainable solution. The prices of 97 medicines have been increased that are used in the treatment of high blood pressure, low blood pressure, cancer, epilepsy, seizures, heart diseases, anti-rabies, etc. It is really difficult for the poor masses to deal with the price hike of medicine while suffering from chronic diseases and it makes them vulnerable. The government seems to have failed against the machinations of hoarders and mafia. This reflects bad governance, huge mismanagement on the part of the government as well as lack of interest in the problems of the lower segment of society.
Certain other factors are surging the prices in an upward direction. For instance, the massive depreciation of the Pakistan Rupee against the Dollar is contributing significantly to the rise in the general price level due to an increase in the prices of the imported commodities including petroleum and oil products. Though fiscal deficit is seven percent with a tax revenue target of 4.9 trillion rupees with a 2.1 per cent growth projection, this still fuels inflation. Moreover, the policy rate has been reduced from 13.25 per cent to seven per cent by the State Bank of Pakistan (SBP) which is two per cent less than September CPI.
This should further reduce to 4 percent to boost economic activities. It will be infeasible for the government to increase the policy rate to control inflation because current inflation has caused by supply-side factors, not by demand-side factors. Bottom line is that the government must adopt the prudent macroeconomic policies coupled with good macroeconomic management to bring down the prices of food and non-food items. There is a need for massive structural reforms to curb hoarding to make the supply chain system efficient.
—The writer is Assistant Professor, Institute of Economics, the University of Azad Jammu and Kashmir Muzaffarabad.

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