Global markets are in turmoil as developed economies face unprecedented inflation largely stemming from the steep increase in energy prices as well as the inability of suppliers to keep up with exploding demand after the world finally came out of Covid-19. Inflation has reached a 40-year high of 8.6 percent in the United States.
Very high inflation has spurred the central bankers around the world into action. In order to control inflation, the US Federal Reserve has started what looks like a succession of interest rate increases with the highest increase since 1994 of 75 basis points. The European Central Bank increased interest rates for the first time in 10 years and the Reserve Bank of Australia increased interest rates by 50 basis points, the highest increase in 22 years. Through such monetary contractions — increasing interest rates — developed nations will eventually bring inflation down, but probably at the cost of an economic slowdown. There are now ample indications to suggest that the US, in particular, is heading toward a recession in 2023.
However, where the developed countries may still be able to avoid an economic hard landing in 2023, these rising interest rates have brought about a steep currency depreciation in many nations of the Global South, including Pakistan and India, as dollars are now leaving equity and bond markets given the higher rate of return now being offered in the US. As a result, both the Pakistani and the Indian rupee are now trading at historic lows.
People in Pakistan were already reeling from the massive increase in fuel prices since the PDM government decided to pass on the international oil price increase under the IMF’s pressure. Now, a depreciating currency will only add to these inflationary woes, especially as, unlike the developed world, the State Bank of Pakistan has shown baffling reluctance in raising interest rates. There are indications that inflation will go over 20 percent by August, this year.
There is no doubt that such steep inflation will make the lives of common Pakistanis difficult with many families falling below the poverty line even as the government expands the social safety assistance to almost 84 million people. Moreover, during such a massive inflationary episode, we can all but say goodbye to the government’s economic growth target of five percent, thereby foreclosing the possibility of job creation.
Is there something the government can do? Yes, thankfully. The government’s response must focus on three things:
First, the government must protect those most vulnerable to such rapidly rising prices. The government should ideally legislate and make assistance to the bottom third of the population a permanent feature. The government should also index BISP stipends to the sensitive price index so that stipends rise automatically with an increase in inflation.
Second, and very importantly, develop and implement a national energy conservation strategy, including a fuel rationing plan that should ideally reduce Pakistan’s total fuel import by 20-25 percent, thereby relieving the pressure on the Pakistani rupee. This national strategy will need to be comprehensive and will have to cover everything -- including incandescent to energy saving bulbs to mandating timings for only letting cars with multiple occupants use main roads. Perhaps, the government could also require all private organisations to ensure the provision of pick and drop services to their employees for a nominal fee.
Finally, the government should take immediate steps to set up strategic oil and wheat reserves that can be used to mitigate future supply disruptions as well as to modulate prices during times when prices in the international market spike due to short-term disruptions like wars or pandemics.
Dark clouds on the economic horizon are looking very ominous. Steep and unrelenting inflation is the biggest economic challenge this government will face. There are still some policy measures that can be taken to ameliorate this situation. The government must act with speed, clarity and sincerity. There is no time to lose.
Very high inflation has spurred the central bankers around the world into action. In order to control inflation, the US Federal Reserve has started what looks like a succession of interest rate increases with the highest increase since 1994 of 75 basis points. The European Central Bank increased interest rates for the first time in 10 years and the Reserve Bank of Australia increased interest rates by 50 basis points, the highest increase in 22 years. Through such monetary contractions — increasing interest rates — developed nations will eventually bring inflation down, but probably at the cost of an economic slowdown. There are now ample indications to suggest that the US, in particular, is heading toward a recession in 2023.
However, where the developed countries may still be able to avoid an economic hard landing in 2023, these rising interest rates have brought about a steep currency depreciation in many nations of the Global South, including Pakistan and India, as dollars are now leaving equity and bond markets given the higher rate of return now being offered in the US. As a result, both the Pakistani and the Indian rupee are now trading at historic lows.
Now, a depreciating currency will only add to these inflationary woes, especially as, unlike the developed world, the State Bank of Pakistan has shown baffling reluctance in raising interest rates. There are indications that inflation will go over 20 percent by August, this year.
People in Pakistan were already reeling from the massive increase in fuel prices since the PDM government decided to pass on the international oil price increase under the IMF’s pressure. Now, a depreciating currency will only add to these inflationary woes, especially as, unlike the developed world, the State Bank of Pakistan has shown baffling reluctance in raising interest rates. There are indications that inflation will go over 20 percent by August, this year.
There is no doubt that such steep inflation will make the lives of common Pakistanis difficult with many families falling below the poverty line even as the government expands the social safety assistance to almost 84 million people. Moreover, during such a massive inflationary episode, we can all but say goodbye to the government’s economic growth target of five percent, thereby foreclosing the possibility of job creation.
Is there something the government can do? Yes, thankfully. The government’s response must focus on three things:
First, the government must protect those most vulnerable to such rapidly rising prices. The government should ideally legislate and make assistance to the bottom third of the population a permanent feature. The government should also index BISP stipends to the sensitive price index so that stipends rise automatically with an increase in inflation.
Steep and unrelenting inflation is the biggest economic challenge this government will face. There are still some policy measures that can be taken to ameliorate this situation.
Second, and very importantly, develop and implement a national energy conservation strategy, including a fuel rationing plan that should ideally reduce Pakistan’s total fuel import by 20-25 percent, thereby relieving the pressure on the Pakistani rupee. This national strategy will need to be comprehensive and will have to cover everything -- including incandescent to energy saving bulbs to mandating timings for only letting cars with multiple occupants use main roads. Perhaps, the government could also require all private organisations to ensure the provision of pick and drop services to their employees for a nominal fee.
Finally, the government should take immediate steps to set up strategic oil and wheat reserves that can be used to mitigate future supply disruptions as well as to modulate prices during times when prices in the international market spike due to short-term disruptions like wars or pandemics.
Dark clouds on the economic horizon are looking very ominous. Steep and unrelenting inflation is the biggest economic challenge this government will face. There are still some policy measures that can be taken to ameliorate this situation. The government must act with speed, clarity and sincerity. There is no time to lose.