Unaffordable food inflation
By Mohammad Ishaq Dar (Ex-Finance Minister)
May 9, 2020 08:29 AM
Unprecedented food inflation in a short period of first 18 months of PTI govt caused hue and cry all over the country as people are unable to afford the prices of essential commodities of daily use as well as medicines.
According to official data of Pakistan Bureau of Statistics (PBS) the Consumer Price Index (CPI) was 4.2% and food inflation was 1% in May 2018 when PML-N‘s government tenure completed. Since then CPI rose to 14.6% and food inflation peaked at 19.5% in urban and 23.8% in rural areas of Pakistan in January 2020. Such level of food inflation hasn’t been seen in last few decades except in 2008-09 when global financial crisis led to steep rise in commodity prices.
Pakistan witnessed raging inflation which averaged at annual 12% over five years 2008-13 and PML-N worked diligently to rapidly bring it down through it’s economic policies during its tenure 2013-18; the average inflation of PML-N five years was 4.82% which was in single digit and ideal to incentivise growth. The exchange rate stability and rapid decline in interest rate during PML-N tenure were the results of an all-round macroeconomic stability and unprecedented build-up of forex reserves which resulted in steep decline in inflation.
Regrettably, PTI government’s incompetence and failed economic policies destroyed the price stability it inherited from PMLN and ended up at high inflation with massive increase in prices of food items of daily use of common man. Additionally, the mafias within PTI played havoc with sugar and flour (aata) prices and made around Rs 100 billion by artificially raising the prices of these items after mindless export permission of sugar by the economic coordinator committee of the cabinet (ECC), duly approved by the Cabinet.
Unlike PMLN, monthly meetings of the National Pricing Monitoring Committee (NPMC), which had federal and provincial governments’ representatives including from food departments, are not held or chaired by Advisor Finance to take notice of erratic movements in prices of essential commodities and to decide corrective and counter measures to manage these.
There has been overall mis-governance and economic mismanagement which has resulted in overall grounding of the economy. The main reasons for alarming inflation are imprudent devaluation of rupee and high interest rate which this government has pursued blindly.
Unfortunately, it has become a habit of PTI government to lay the blame of it’s imprudent and thoughtless devaluation and interest rate hike on the policies of the previous government. Nothing is farther from the truth and PTI government is only looking for an alibi to cover it’s failure. In the last three months, PTI has a new excuse of Covid-19 pandemic to which will be associated its future failures.
The government, before entering into IMF program, allowed free fall of rupee which triggered inflation, particularly of food prices; then to control inflation it used the monetary tool of jacking up interest rate. This vicious circle continued even after agreeing for an IMF program and rupee/$ rate reached 160s. Interest rate peaked at 13.25% as opposed to 6.25% when PML-N left; reluctantly it has recently been brought down to 9% in three phases in post Covid-19 adjustments which were compulsory and widely demanded by business community in line with international phenomena.
Sadly, PTI government had also been raising dollars by issuing short term treasury bills with 13.5% interest rate known as ‘Hot Money’; an amount of $3.7 billion was raised since July 2019 but with Covid-19 and fall in interest rate, $2.9 billion has already been repatriation from Pakistan.
For the purpose of record, PML-N had never agreed with IMF of any condition that required self-slided devaluation of rupee or raising of interest rate. What PML-N prudently agreed in July 2013 was forex reserves accumulation targets and a commitment to maintain positive real interest rates and these principles were religiously followed and targets achieved with margins till IMF program successfully completed in September 2016.
PTI claim that PML-N government artificially controlled the exchange rate is absolutely baseless. How can that be possible for long four years period and in December 2017 the Bloomberg reported that Pak Rupee had been most stable currency in South Asia since 2014. It was only possible with building up of forex reserves and achieving macroeconomic stability which was globally recognised and documented. There was no other way to hold the exchange rate stable.
In post nuclear detonation, $/rupee parity touched 67/69 in Sep 1998 due to havoc played by some speculators but PML-N handled it timely and effectively which brought $/rupee parity back to 52 and remained stable there for months till the Oct 1999 coup.
The exchange rate regime pursued by the PML-N government in recent tenure was no different than what it established in early 1999 where the inter-bank market in forex was established which is the sole determinant of the exchange rate. PML-N’s two decades old introduced regime continues to this day, no matter the hype created regarding market determined exchange rate or real effective exchange rate (REER).
The myth of artificiality has been contrived by an ill prepared PTI government which got installed without having any plan, policy or road map. It immediately lost the market’s confidence as it failed to present any credible economic plan to the national and global institutions.
Devaluation was advocated by some as the panacea for increasing exports and they should now serious reflect the ground realities. Exports for FY16 and FY17 were $22 Bio each.
Having completed IMF Program in Sep 2016, PML-N engaged the Exporters’ Associations to work out with the government a relief package with which they would deliver growth in exports. On 10 January 2017 mutually agreed Rs 180 billion exporters package was announced by PML-N which was later beefed up with another Rs 67 billion in Aug 2017, thereby making it total of Rs247 billion which led the exports to grow by 12.7% to $24.8 Bio in FY18.
Had this formula been followed by PTI in coming FY19 and FY20, we would have ended with exports figure of around $31 Bio by June 2020. But PTI government chose to follow pseudo intellectuals’ bookish theory, who were demanding a slide of $/rupee to 127 to boost exports, and allowed self slide of rupee devaluation but could not manage till it slided to 160s. Soon after it crossed $/127, such pseudos publicaly distanced themselves from PTI’s policy and criticised them on camera. Despite massive devaluation, FY19 ended up with negative growth of 2% with $24.2Bio and in current FY20, there has been no impressive results so far on this account.
While PML-N insulated 92% of the economy (exports being 8%) from damage of devaluation and got growth of 12.7% in exports with targeted support, PTI has ruined the entire economy by massive slide of the rupee which resulted in sky high inflation for the common man and shrunk the GDP growth of 5.8%, that it inherited from PML-N, to 3.3% in FY19 and now projected to be negative 2% in FY20.
However, due to Covid-19 pandemic in last three months, millions have been made jobless and multi millions pushed below poverty line as a result of which people’s disposable incomes have heavily shrunk, most of industry closed and GDP has nose dived; this has led to demand compression and resultantly CPI came down to 10.2% with food inflation at 13% and 15.5% in urban and rural areas respectively in March 2020 with latest numbers of CPI 8.5% and food inflation 10.4% urban and 12.9% rural in April 2020.
Comparing with PMLN’s food inflation of 1% in FY18 that was inherited by PTI, the Covid-19 pushed down latest inflation numbers are still very alarming and unaffordable not only for the common man but also for middle and upper middle class.
PTI government must take urgent monetary, fiscal and administrative measures to curb the inflation, specially food.
(The author is former Finance Minister of Pakistan and Fellow Member of the Institute of Chartered Accountants in England and Wales)