AGL40▲ 0 (0.00%)AIRLINK129.06▼ -0.47 (0.00%)BOP6.75▲ 0.07 (0.01%)CNERGY4.49▼ -0.14 (-0.03%)DCL8.55▼ -0.39 (-0.04%)DFML40.82▼ -0.87 (-0.02%)DGKC80.96▼ -2.81 (-0.03%)FCCL32.77▲ 0 (0.00%)FFBL74.43▼ -1.04 (-0.01%)FFL11.74▲ 0.27 (0.02%)HUBC109.58▼ -0.97 (-0.01%)HUMNL13.75▼ -0.81 (-0.06%)KEL5.31▼ -0.08 (-0.01%)KOSM7.72▼ -0.68 (-0.08%)MLCF38.6▼ -1.19 (-0.03%)NBP63.51▲ 3.22 (0.05%)OGDC194.69▼ -4.97 (-0.02%)PAEL25.71▼ -0.94 (-0.04%)PIBTL7.39▼ -0.27 (-0.04%)PPL155.45▼ -2.47 (-0.02%)PRL25.79▼ -0.94 (-0.04%)PTC17.5▼ -0.96 (-0.05%)SEARL78.65▼ -3.79 (-0.05%)TELE7.86▼ -0.45 (-0.05%)TOMCL33.73▼ -0.78 (-0.02%)TPLP8.4▼ -0.66 (-0.07%)TREET16.27▼ -1.2 (-0.07%)TRG58.22▼ -3.1 (-0.05%)UNITY27.49▲ 0.06 (0.00%)WTL1.39▲ 0.01 (0.01%)

Optimal strategy for controlling inflation

Share
Tweet
WhatsApp
Share on Linkedin
[tta_listen_btn]

IF there are viruses in the water and the water is boiled at 100 degrees for a few minutes, all the viruses can be destroyed. But no one ever thought of putting an infected person in boiling water, because the patient will also be destroyed along with the virus. So instead of boiling, we spend thousands of rupees to buy antibiotics. Although historical evidence denies the possibility of controlling inflation with interest rates, let’s assume for a moment that it is possible. In that case, is it sensible to put the whole economy at stake to control inflation, or should an alternative solution be found for this purpose?

The list of effects of increase in interest rate does not include inflation only, it also has many other effects. For example, in the current financial year, over 7300 billion rupees have been allocated for the payment of interest on the domestic debt. This amount is larger than all other expenditures collectively and it is only a result of over consciousness about inflation. On the amount of debt owed by Pakistan, if the interest rate of 2017 was applied, only 1900 billion would be required to pay the interest. If Bangladesh’s interest rate was applied, the interest payments would reduce to 1500 billion. That is, if you choose any of these interest rates, you can save at least 5000 billion. With 5000 billion in hand, 80% of today’s economic problems could be solved.

The interest rate was voluntarily raised by the State Bank from 7% to 22% without any demand from lenders. The purpose of the rise in interest rate was to control inflation and the increase in mark-up payments is the direct price of attempting to control inflation. Unfortunately, the historical data indicate that the rise in interest rate is counterproductive and it increases inflation instead of reduction. Is it better to try unsuccessfully to control inflation by paying such a huge price or to reduce the prices of food by starting new agricultural production with the same amount?

If official interest is 22%, the interbank rate known as KIBOR, will be 23% and business loans will be available at a minimum of 26%. At this rate, it is nearly impossible for a sensible person to borrow for a business. When people are not able to do business, economic growth will stop and unemployment will increase. This is another cost of the rise in interest rate. Though economic theories differ on how interest rate affects inflation, however, all theories agree that rising interest rates have a negative effect on employment. Any pressure on employment will affect the daily wage workers and temporary job holders, the most vulnerable people in society. Even if we assume that high interest rate can reduce inflation by raising interest rates, it would be extremely inappropriate to do so at the cost of employment of the poorest people.

Unemployment in present times is not just a loss of a few rupees. Unemployment increases poverty and reduces resources for the health and education of children, which affects all health and education statistics. An increase in interest payments also reduces funds available for social spending and thus negatively affects health and education indicators. Should all this be tolerated for the sake of controlling inflation? If we were to list the effects of interest rate hike, it would include increase in public debt, slowdown in economic growth, increase in unemployment and negative impact on education and health. Should we tolerate all this for a doubtful attempt at controlling inflation?

If the benchmark interest rate is four percent, it will be possible to provide business loans at 7% without any subsidy. Imagine if business loans in Pakistan were available to every candidate at 7%, how many youths would want to start a business? How much can unemployment be reduced by this? The ineffectiveness of interest rates as a cure for inflation is self-evident. So the question arises, what can be done to control inflation in such a situation? In fact, there are many measures that can be taken to create immediate employment and prevent inflation in the next six months.

For example, in the last financial year, we imported soybean oil worth $304 million, wheat worth $958 million, palm oil worth $3362 million, pulses worth $748 million, cotton worth $2415 million. Except for palm oil, these commodities can be harvested in five to six months. If the government provides technical assistance and credit to the farmers to grow these commodities in abundance, it can enable us to reduce imports by $5 billion dollars in the next financial year. If this happens, not only will we be able to control the prices of these commodities in the local market, but also by improving the current account, the goal of stabilizing the value of the dollar can also be achieved, which will further help control inflation in next year.

Last financial year Pakistan spent $16600 million on fuel imports. We have hundreds of millions of cattle and other animals and if the government was providing technical and financial support for biogas plants and dairy farms, fuel worth hundreds of million dollars can be saved. Similarly, the waste from hotels and vegetable markets can be used for biogas. By producing biogas, we can get a spectrum of benefits e.g. the current account can be made better, a concrete step towards self-reliance can be taken and a significant progress in solving environmental problems can be achieved. This project doesn’t need any expensive equipment and will be able to produce output in less than a month.

One can ask the question from where to get the money to provide loans for cultivation of agricultural commodities or biogas plants? The solution is to bring the interest rate back to the level of 2018 level and allocate 10% of the savings for the above mentioned purpose. The remaining 90% can be used by the government to deal with other economic problems. These measures will stabilize the value of the dollar, would help to get rid of the clutches of the IMF, and would provide employment to millions of people. Our economic problems are not insurmountable. Solving these problems is possible and easy, but it requires visionaries whose wisdom is not pledged to the IMF.

—The writer is Director, Kashmir Institute of Economics, Azad Jammu and Kashmir University.

Email: [email protected]

 

Related Posts

Get Alerts