How The PTI Government’s Policies Fueled Unprecedented Inflation

There is serious public outrage across the country due to an unprecedented hike in the prices of essential commodities. A comparison of few such items indicating the price increase over the first three years (August 2018 to September 2021) of the PTI government would give a clearer picture; for example:

Prices per kilogrammes increased in rupee of flour from 35 to 75 (114 percent), sugar from 55 to 110 (100 percent), ghee from 140 to 340 (142 percent), rice from 80 to 160 (100 percent), masoor pulse from 113 to 183 (62 percent), mash pulse from 145 to 250 (72 percent), moong pulse from 113 to 176 (56 percent), mixed vegetables from 45 to 110 (144 percent), milk from 90 to 130 (44 percent), yogurt from 100 to 220 (120 percent), eggs from 120 to 180 (50 percent), beef from 350 to 800 (129 percent), and mutton from 740 to 1,500 (103 percent); electricity per unit in rupee has gone up from two to six (200 percent) for life-line consumers and from 8 to 24 (200 percent) for others; and prices of medicine have increased in the range of 250 percent to 400 percent.

Inflation has been constantly fueled by the PTI government since it came to power in 2018 through announcement of official increase in the prices of petroleum products and cooking oil together with levy of more regulatory customs duties on a large number of imported items.

Trajectory Of Inflation Indices

The trajectory of price indices presents a bleak picture when the three years of PTI rule is compared with the immediately preceding PML-N’s last three years (2015-18). Consumer Price Index (CPI) registered 10.94 percent increase during 2015-18 as opposed to 27.36 percent increase during 2018-21; Sensitive Price Index (SPI) rose by 3.73 percent (as against 35.82 percent increase; and Wholesale Price Index (WPI) recorded 6.46 percent increase as opposed to 32.44 percent increase during the three-year periods 2015-18 and 2018-21 respectively.

These figures show a very grim picture of how miserably the PTI government has failed in maintaining the price stability which it inherited in 2018 from the PML-N government. In the last three years, most indices indicated double digit inflation during the period 2018-2021, compared to low single digit maintained by the PML-N during the period 2015-18. A simple addition of annual inflations across all the three indices shows the PTI’s inflation on average was 10 percent per annum or more against less than three percent of the PML-N’s.

The most worrying area is food inflation, which was under two percent when the PML-N government completed its term in 2018. It reached 24 percent in rural and 19 percent in urban areas in November-December 2020 during the PTI’s government and unfortunately it still remains high in double digits.

The latest annualised inflation number of 14.48 percent for last week released by the Pakistan Bureau of Statistics (PBS) is extremely worrisome as it indicates that there is no hope for the containment of this menace in the near future.

The suffering of Pakistanis due to high inflation during 2018-21 is not surprising when viewed in the backdrop of certain major follies committed by the PTI government in its first three years, which are briefly discussed below:

Massive Devaluation

The rupee/dollar devaluation has always contributed towards inflation in the economic history of Pakistan. General (R) Musharraf’s era witnessed devaluation of Rs30 (82-52) during 1999-2008, PPP’s 2008-13 had Rs 17 (99-82), PML-N’s 2013-18 ended up with Rs17 (116-99) and in the caretaker’s three months Rs7 (123-116). But the PTI government has set a bleak record of devaluation of Rs50 (173-123) in its three years power.

At the outset, the PTI government exaggerated the ill effects of the current account deficit. Consequently, it undertook a massive devaluation of 40 percent in two years which resulted in steep decline in the current account from $19.2 billion in 2017-18 to merely $2 billion in 2020-21. This was nothing short of slaughtering and grounding the economy. In the first two years (2018-2020), LSM declined by three percent and 10 percent respectively as importing industrial raw material became too expensive.

Sadly, the PTI team failed to comprehend how the loss in the value of rupee makes life of a common man miserable as this is always one of the major causes of high inflation.

This was a poorly conceived policy and it us evident from the fact that much of the adjustment fell on imports from $56 billion to $43 billion, a knock down of 25 percent in imports.

Ostensibly this was done in the name of removing the import bias in the exchange rate hurting exports as propagated by spin-wizards who have long disappeared from the scene on this account.

The exports in the PTI’s three years have increased from $24.8 billion in 2017-18 to $25.6 billion in 2020-21. So, all told, increase in exports in three completed fiscal years is only $800 million. Is this sum a worthwhile compensation for a staggering 40 percent devaluation of rupee? It would be hard to find another example of such colossal loss of national resources and the ill effects that the nation still continues to suffer.

The rupee devaluation also led to an unbearable rise in domestic prices as most critical imports such as petroleum products, electricity, gas and edible oil became very expensive and contributed to high inflation. In addition, the foreign (external) debt and its interest payments also became unbearable. Besides this, an amount of over Rs4,000 billion has been the capital loss through increase in the public debt due to devaluation.

Interest Rate

Another folly committed by the PTI government was the steep rise in interest rate. The policy rate was almost doubled within a period of one year, from around 6 percent to 12 percent and subsequently to 13.25 percent, where it was kept for nearly a year.

It is claimed by the State Bank of Pakistan (SBP) that it was targeting headline inflation as well as forward looking policy to remain ahead of inflation. These two things resulted in a massive rise in interest payments, which jumped from Rs1.3 trillion in 2017-18 to Rs2.6 trillion in 2019-20, in just first two years of PTI’s government. The shift led to around five percent real interest rate (difference between policy rate and headline inflation) for about one and half years (November 2018 to May 2020).

This alone gave an estimated benefit to the banks and financial institutions of Rs450 billion during this period. High interest expenditure resulted in increased fiscal deficit which created a compounding effect of increase in public debt.

The fiscal deficit of 8.9 percent and 8.1 percent was recorded in the first two years of the PTI government and the public debt, as percentage of GDP, rose from PML-N’s 72.5 percent in 2017-18 to the PTI’s 85 percent and 87 percent in 2018-19 and 2019-20, respectively.

Following the global outbreak of the Covid-19 pandemic, when the whole world reduced the interest rates to support their economies and people, the SBP reluctantly reduced in phases the policy interest rate from 13.25 percent to seven percent within a quarter, sometime holding multiple monetary policy committee (MPC) meetings within a month which are otherwise held once in every two months. This lowering of interest rates moderated the rising interest payments which grew only by five percent during 2020-21 and the fiscal deficit reduced to 7.1 percent; Public Debt to GDP accordingly adjusted downwards to 83.5 percent. But this fiscal deficit is still too high for controlling inflation. In its presence, the PTI government is deluding itself by thinking it is focusing to control inflation.

Heavy Taxation

The PTI government happily adopted the budget presented by the PML-N government in May 2018, except for cosmetic changes, but it failed to achieve any of the key budgetary targets. The fiscal deficit, as noted above, ended up at 8.9 percent although it was budgeted at 4.9 percent.

When the government finally decided to enter into an IMF program in June 2019, the Fund set an unrealistic target for FBR revenue collection. In 2018-19, FBR collection was only Rs 3,829 billion even though the target was Rs4,300 billion, indicating a negative revenue growth after 23 years. Despite such low yields, the PTI team agreed with IMF to achieve a tax target of Rs5,550 billion for 2019-20, which amounted to a nominal increase of Rs 1,721 billion or 4.5 percent of GDP, which was simply ridiculous. For this purpose, new taxes of Rs735 billion were imposed on the people in order to achieve said unrealistic revenue goal. FBR collection for 2019-20 was Rs3,998 billion which included Rs100 billion supplementary grant from the federal government for payment of tax refunds which otherwise were due to be paid by FBR out of its revenue collection; therefore, the actual FBR collection was Rs3,898 billion. This was a horrendous revenue performance which turned out the budget deficit to 8.1 percent. During the third fiscal year 2020-21, there has been an increase of 21 percent in taxes collection, making an average annual growth of seven percent in first three years of the PTI.

While the PTI government failed to achieve its tax targets, yet they contributed heavily, through interest rate hike and massive devaluation, in accelerating the price increases across the board resulting into high inflation. Concurrently, it had an overall negative effect on GDP, the growth.

Mafias And Scams

Never in Pakistan’s history the nation has witnessed mega scams run by mafias associated with the government of the day such as sugar, flour, petroleum products and medicines which jacked up the prices of these items to an extent where the people have been forced to pay annually thousands of billions of rupees extra to buy the same quantities of goods and utilities.

Buoyed by some growth in 2020-21, the PTI government has already embarked on an expansionary path. In two months (July-August 2021) the current account deficit has already shot up to $2.3 billion. They also want to remain in the IMF program. But then Fund would demand austerity by slowing down the economy, leading to further rise in electricity prices, cutting down PSDP and more adjustments in interest and exchange rates. With such changes, the goals of accelerating the growth and controlling inflation would be off the table.

Non-existence of prudent, proactive and constructive economic policy well supported by fiscal discipline and anti-inflationary measures has landed the people in a state of unbearable inflation.

The major mistakes mentioned above, all PTI government’s own making, have contributed to an unprecedented hike in inflation, particularly prices of food items and utilities. With follies made by this government, there is no case for PTI to complain about imported inflation. The pain and misery inflicted on hapless people in the first three years of PTI l’s government under the leadership of Imran Khan through insane 40 percent rupee devaluation, imprudent interest rate management, heartless heavy taxation and mafias-pushed price increases of essential commodities has caused severe unrest in the people who have started protesting throughout the country against the unparalleled inflation in the history of Pakistan.

The author, a UK fellow chartered accountant, is a former finance minister of Pakistan and former leader of opposition in the Senate of Pakistan