Soaring inflation and domestic politics


A deal with the International Monetary Fund (IMF) is on the cards after meeting its front-loading conditions

The fund has already combined its ninth and tenth review which, in turn, delayed the disbursement of the much-needed loan tranche

The revival of the stalled programme will reduce the lingering economic uncertainty as Pakistan received the last tranche in August 2022

The liquid foreign exchange reserves (FX) held by the State Bank of Pakistan (SBP) declined to around $3

2 billion by February 10, 2023

Pakistan’s political situation remained volatile during 2022

The foreign exchange reserves kept on declining since March 2022 and the political mercury kept increasing till December 2022

Though the political temperature has subsided a bit, the situation is still far from normal

The heightened domestic political uncertainty leads to a great deal of economic uncertainty

On the international front, the western world is also experiencing high inflation

Therefore, central banks have already raised policy rates during 2022

Russia-Ukraine conflict contributed to food and energy inflation

The higher policy rates have slowed down many economies and reduced speculation in the international commodity markets

As a result, a decline is being witnessed in prices of most of the commodities

Around a year ago, the price of wheat per bushel was around $12, which is now around $8

6, showing a reduction of 30%

Similarly, the price of corn was around $7

85 per bushel, which declined to $6

7 in a year

In April 2022, the crude oil price was around $108 per barrel, which is currently hovering around $77 per barrel, showing a reduction of 30%

The growth rate is constrained by balance of payments (BOP) in Pakistan

The maximum achievable growth rate was 4

5% in 2007, which reduced to 3

8% in 2020

Successive governments could not address this constraint and try to pump up the economy above this level

Now, this constraint has aggravated the BOP situation more than ever before

Regardless of the political setup, the current situation is unprecedented in the history of Pakistan

Average inflation rate for July-January FY23 was around 25% while the Sensitive Price Indicator was around 29%

The situation has been affecting the lowest segment of the population a great deal

Structural inflation is not associated with a particular political administration

Its causes are deep-rooted and cannot be addressed in a short span of time

Whenever accelerated prices affect a common person, he/she blames the current political setup for the woes

The parties in opposition squeeze maximum benefit out of this situation and put comparative figures of oil, utilities, wheat and milk in front of the masses

Furthermore, spokespersons put the blame on the government by highlighting rampant corruption, incompetence and mismanagement

Under these circumstances, the parties in the government try to put the blame on the misgivings and acts of omission and commission of the previous government

In addition, their spokesmen advise the masses to wait for good days

This is the way political parties build and spread their narratives by using the print and electronic media

However, thorny issues remain as such

In short, structural issues are compounded by the volatile domestic political situation and international economic environment

All these factors enhance economic uncertainty

High economic uncertainty adds fuel to the fire and aggravates the situation

The emerging situation requires statesmanship

Let us see how the current political dispensation navigates the crisis in the coming months

  THE WRITER HAS WORKED AS THE ASSISTANT PROFESSOR OF ECONOMICS AT SDSB, LAHORE UNIVERSITY OF MANAGEMENT SCIENCES (LUMS)



Date:28-Feb-2023 Reference:View Original Link