There was a projection by the International Monetary Fund that inflation in Pakistan may surge to 14% by the end of the current fiscal. Almost everyone is talking about the double-digit inflation to be witnessed in a couple of months. This might prove true since the current circumstances do augur somewhat double digit inflation which could dissipate the purchasing power of the most vulnerable stratum of the society. There is a prevalent assumption that the upcoming IMF program would push the inflationary pressures further causing tribulations for the down-trodden. Inflation surged to 9.4% in March 2019 whereas the average inflation during the July-March of the current fiscal rose by 6.79% on a yearly basis. The projected inflation by the government was 6% for the current fiscal which has been surpassed dramatically. The inflation was 3.92% during 2017-18 whereas it was 4.16% in 2016-17.
The populace may not fathom what drives the inflationary pressures in Pakistan in particular. However there is consensus that the rampant inflationary pressures in Pakistan are driven by rupee depreciation and sky-high energy prices. The increase in the discount rate by the central bank has not proved helpful in terms of restraining inflation particularly over the period of last year or so. Double digit discount rate is considered detrimental for the economic growth and seems to dampen the performance of the manufacturing sector in particular. The massive and dramatic increase of 4.5% in the discount rate over the period of one year has not been able to curtail inflation rather has restrained the economic activities. The increase in the interest rate by the central bank are aimed at restraining the growth of the money supply which should ideally culminate with lower inflation, however, the effectiveness seems to have lost somewhere perhaps in the wake of poor fiscal discipline.
The impact of the local currency devaluation of around 40% over the period of last two years has become one of the massive forces for inflation. When the rupee depreciates, the impact is evident primarily in the prices of imported goods, let alone the locally manufactured goods which also are contingent upon the imported raw material in a number of cases. The value of the rupee went down 18.65% against the US dollar between December 2017 and June 2018. Generally it is heard in Pakistan that the rupee is overvalued which eventually leads to depreciation in phases. It is also presumed that massive depreciation of rupee against US dollar would open floodgates of inflation which could bring about adverse effects on the living conditions of the masses. Looking at the figures when the rupee devalued by 31.5% during 2017-2018, many presume that the forthcoming IMF program may further lead the local currency to southwards.
The erstwhile government knew that the PTI-led government would have to go to the IMF to tackle the balance of payment issues at the start of its tenure. The entry into an IMF program was being perceived as increase in energy prices, devaluation of the local currency and the increase in taxes. One must be acquainted well that the increase in the prices of energy primarily petroleum products has the domino effect. The impact of the high fuel prices is always evident in the prices of staples since the retailers do not hesitate in passing on the impact of higher transportation cost to consumers in no time which ultimately decelerates the purchasing power of those who are the most vulnerable.
The government needs to take some prompt measures to tackle the spate of the inflationary pressures witnessed since the inception of its tenure last year. Moderate inflation seems a good sign for the economic activities, however, biting inflation may drive away the investors and encourage transactions in foreign currency since inflation erodes trust in the national currency. It is a common knowledge that inflation discourages investment in projects. The incumbent government needs investment to generate employment opportunities.
Double digit discount rate with impending double digit inflation could dampen the already flagging economic activities which would eventually lead to the malaise in the society. The purchasing power erosion and less income opportunities call for the economic policies to move in the right direction benefiting the masses.