Unprecedented food inflation in a short period of the first 18 months of the Pakistan Tehreek-e-Insaf’s (PTI) government has caused hue and cry all over the country as people are unable to afford 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 percent and food inflation was one percent in May 2018 when the tenure of the Pakistan Muslim League-Nawaz (PML-N) government ended. Since then, the CPI has risen to 14.6 percent and food inflation peaked at 19.5 percent in urban and 23.8 percent in rural areas of Pakistan in January 2020. Such level of food inflation has not been experienced in a long time, except in 2008-09, when the global financial crisis led to a steep rise in commodity prices.
Pakistan witnessed raging inflation which averaged at annual 12 percent over five years. The PML-N worked diligently to rapidly bring it down through its economic policies in its 2013-18 tenure; the average inflation in these five years was 4.82 percent which was in single-digit and ideal to incentivise growth. The exchange rate stability and rapid decline in interest rate during the PML-N’s tenure were the results of all-round macroeconomic stability and unprecedented build-up of forex reserves which resulted in steep decline in inflation.
Regrettably, the PTI government’s incompetence and poor economic policies destroyed the price stability it inherited from the PML-N and ended up causing high inflation with massive increase in prices of food items of daily use of common people. Additionally, the mafias within the PTI wreaked havoc with sugar and flour prices and made around Rs100 billion by artificially raising prices of these items after mindless export permissions for sugar by the economic coordinator committee of the cabinet (ECC), duly approved by the cabinet. Unlike the PML-N, 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 the PM’s advisor on 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 poor governance and economic mismanagement which has resulted in overall grounding of the economy. The main reasons for alarming inflation are imprudent devaluation of the rupee and high interest rates which this government has pursued blindly.
Unfortunately, it has become a habit of the PTI government to lay the blame of its imprudent and thoughtless devaluation and interest rate hike on the policies of the previous government. Nothing is farther from the truth and the PTI government is only looking for an alibi to cover its failure. In the last three months, the PTI has a new excuse of the Covid-19 pandemic to which will be associated its future failures.
The government, before entering into an IMF program, allowed free fall of the rupee which triggered inflation, particularly of food prices; then to control inflation it used the monetary tool of jacking up interest rates. This vicious circle continued even after agreeing to an IMF program and rupee/dollar rate reached 160s. Interest rate peaked at 13.25 percent, as opposed to 6.25 percent when the PML-N left; reluctantly it has recently been brought down to 9 percent in three phases in post-Covid-19 adjustments which were compulsory and widely demanded by the business community in line with the international phenomena. Sadly, the PTI government had also been raising dollars by issuing short term treasury bills with 13.5 percent 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 rates, $2.9 billion has already been repatriation from Pakistan.
The PML-N had never agreed with IMF on any condition that required self-sliding devaluation of the rupee or raising the interest rate
For the purpose of record, the PML-N had never agreed with IMF on any condition that required self-sliding devaluation of the rupee or raising the interest rate. What the PML-N prudently agreed to 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 the IMF program successfully completed in September 2016.
The PTI claim that the PML-N government artificially controlled the exchange rate is absolutely baseless. How can that be possible for a four-year period? In December 2017, the Bloomberg reported that the Pakistani 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 September 1998 due to the havoc caused by some speculators but the PML-N handled it timely and effectively which brought $/rupee parity back to 52 and remained stable there for months till the October 1999 coup.
The exchange rate regime pursued by the PML-N government in its recent tenure was no different than what it had established in early 1999, where the inter-bank market in forex was established which is the sole determinant of the exchange rate. The PML-N’s two-decades-old 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 the PTI government which was installed without any plan, policy or road map. It immediately lost the market’s confidence as it failed to present any credible economic plan to national and global institutions.
Devaluation was advocated by some as the panacea for increasing exports and they should now seriously reflect on ground realities. Exports for FY16 and FY17 were $22 billion each. Having completed the IMF program in September 2016, the PML-N engaged the Exporters’ Associations to work out with the government a relief package with which they would deliver growth in exports. On January 10, 2017, a mutually-agreed Rs180 billion exporters package was announced by the PML-N which was later beefed up with another Rs67 billion in August 2017, thereby making it total of Rs247 billion which led the exports to grow by 12.7 percent to $24.8 billion in FY18. Had this formula been followed by the PTI in coming FY19 and FY20, we would have ended with exports figure of around $31 billion by June 2020. But the 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 slid to 160s. Soon after it crossed $/127, such pseudos publically distanced themselves from the PTI’s policy and criticised them on camera. Despite massive devaluation, FY19 ended up with negative growth of two percent with $24.2 billion and in current FY20, there have been no impressive results so far on this account. While PML-N insulated 92 percent of the economy (exports being eight percent) from damage of devaluation and got growth of 12.7 percent in exports with targeted support, the PTI has ruined the entire economy by a massive slide of the rupee which has resulted in sky high inflation for the common man and shrunk the GDP growth of 5.8 percent, that it inherited from the PML-N, to 3.3 percent in FY19 and now projected to be negative two percent in FY20.
However, due to the Covid-19 pandemic in last three months, millions have been rendered jobless and millions pushed below the poverty line as a result of which disposable incomes have heavily shrunk, most of the industry closed and the GDP has nose-dived; this has led to demand compression and resultantly CPI came down to 10.2 percent with food inflation at 13 percent and 15.5 percent in urban and rural areas respectively in March 2020 with latest numbers of CPI 8.5 percent and food inflation 10.4 percent urban and 12.9 percent rural in April 2020. Comparing with the PML-N’s food inflation of one percent in FY18 that was inherited by the 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. The PTI government must take urgent monetary, fiscal and administrative measures to curb the inflation, especially food.
The author is former finance minister of Pakistan and fellow member of the Institute of Chartered Accountants in England and Wales. He can be reached on Twitter: @MIshaqDar50