The Pakistani Spectator

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Controlling Inflation in Pakistan

By Shaukat Masood Zafar • Jan 6th, 2012 • Category: Lead Story • 9 Comments

Present Pakistan People’s Party Government has totally failed to control inflation. The cost of the ever worsening problem is constantly being paid by the people of Pakistan without any iota of respite. People are facing unprecedented high inflation together with high unemployment, a decline in Growth Rate and decreased currency value, and high food and fuel prices. Inflation has hit the common people because the prices of almost all essential commodities have gone up from 150 to 300 percent in the past four years. The most hurt by inflation are the lower income segments of the society followed by the middle income group. Today the state of inflation has reached at such a level which is causing devastating effects to the country’s very survival, integrity and sovereignty. The mounting debt and liabilities are being used for non-productive expenditures.

Besides, the non seriousness, bad governance, and massive corruption and plundering at the part of government, there are some of the other glaring and irrefutable reasons for this rising inflation in Pakistan.

Inflation is caused by increasing the number of Rupees without increasing the amount of stuff like gold. With increase of money supply by the Government/ State Bank, inflation is caused.  When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. Money supply and inflation grow at almost the same rate side by side. The combination of a bad economy with an increase in costs is bad for stocks. Also, a company is in the same situation as a normal consumer  - the more cash it carries, the more its purchasing power decreases with increases in inflation. In Pakistan State Bank lacks complete independence. We have such a defective system in place in which the State Bank of Pakistan is controlled by the ruling politicians, who use the State Bank in their personal interests. They force the Bank to print limitless money in the guise of running development projects and job creation, which results in high inflation, a potentially bigger evil than lower economic development. State Bank should strictly tie the creation of money to the creation of stuff. Reduction in the governments spending is necessary to stop new money from entering the system. To further remove money from the system bonds can be sold. Raising interest rates, as practiced in Pakistan, is one of the chanciest ways of trying to reduce inflation, because it works mainly by inhibiting people who might borrow money with the intention of investing it in an attempt to increase their output.

The problem of inflation, unlike some other problems facing our country, is one that doesn’t need a rocket science to curtail. Loans cannot rescue budget deficit. Pakistan has been facing huge fiscal deficits and debt servicing continues to be the most serious problem today. The lethal combination of low revenue collection and high Government expenditure is accompanied by a high fiscal deficit, increasing unemployment, rising inflation and debt burden. The object of curtailing inflation can be achieved simply through curtailment of monetary expansion, lowering budget deficit, reducing our Government Luxury Expenses both at Federal and Provincial level, promoting efficiency by education and skill (Human Resource Development), Completely reassessing the system of Direct and Indirect Taxes, reducing unemployment, enhancing agriculture production through research and credit availability, charging Capital Gain Tax/ Wealth Tax to Burger and Theft Families and persons, Implementing effective Monopoly Control System, promoting national savings by offering positive rate of return on deposits and identifying profitable avenues of investment and revival of the economy by solving the problems of sick industrial units and quick and transparent privatization of public sector enterprises.

Pakistan needs only sanity and correct policies. Agricultural income is taxed all over the world except Pakistan, which needs immediate attention of the Government. The existing policy needs immediate revamping and tax base has to be broadened to minimize the tax evasion that will make it possible to achieve the ambitious target, ensuring long term increase in tax to GDP ratio. Heavy leakage of resources in public sector enterprises needs to be halted urgently. Pakistan’s industrial production has stagnated for the last four years. Fiscal measures by the incumbent regime have not allowed promoting the production capacity of the economy. The industrial growth rate has come down to the alarming level. Credit off take by the private sector has remained negative. Foreign investment has been declining over the last four years.

The promotion of industry is essential for boosting industrial production; this requires concrete measures and industry-specific action plan. If the federal government is sincere with the people of Pakistan, it should take the necessary measures to rein in rising prices of commodities by waiving all taxes on food items and on gas, water, electricity, petroleum products, and should not provide any subsidy to the industries as the industrialists don’t pass on this subsidy to the consumers. The inflation not only affects the purchasing power of the already down trodden people rather minimizes chancing of recovery towards growth. Unfortunately our bureaucracy is also not geared to tackle the present economic situation. It is ill-equipped to manage the market economy. It is essential that professionals with vision be inducted into the government set-up to forge a new approach to the economy. The provincial governments should also establish an effective mechanism to control the prices particularly of food items.

Unfortunately, in Pakistan, Government has never invited foreign investment for the production of basic goods. A major factor contributing in controlling food inflation and provides raw material to other major industries would be to enhance agricultural yields; it has been altogether ignored. Focus should be on value-added agriculture and farming, like fruits, vegetables, and livestock. Selling basic food items at Utility Stores is not a viable way to control inflation. Only privileged group takes the major part of goods from these stores, rendering the poor having no access over these basic goods. Government further claims that the role of the Trading Corporation of Pakistan (TCP) has been enhanced. Everybody knows the TCP is used only to protect the interests of elite sugar mafia.

Controlling such inflation requires deep rooted fiscal reforms. A strong “political will” is needed to deal and tackle these issues which are crucial and essential for the stability and progress of the country. It is high time to live within our own means rather than begging for loans from IMF and other international agencies to spend on non-productive operation such as paying the perks and salaries of the administration. To get rid of bank borrowing and ultimately to curtail the expenses on debt servicing, the government should expand tax base by netting more assesses including incomes from farm earnings and property business. The government should also reduce tax rate and increase number of assesses. Also, the Federal Government needs to regulate the trade deficit more effectively, which is presently cushioned by the huge remittances by the overseas Pakistanis. The Competition Commission of Pakistan should be empowered further to deal with iron hands those companies and manufacturers who are involved in cartelization. One of the reasons of inflation is prevailing rampant corruption in the government departments. The accountability law should be enforced and across the board accountability be done to control the corruption. Controlling inflation and price-hike should be the priority areas before the government for which all out efforts should be made. The decline in investment and saving levels need to be reversed and significantly increased to ensure stable and higher growth.

Due to good governance and effective policy making India has outperformed Pakistan in all segments of the macroeconomic during 2010-11 too like previous so many years. In Pakistan, the direct tax to total tax revenue ratio was only 35.3 per cent whereas India obtained 56.8 of tax revenue from direct tax. Pakistan’s real GDP grew at the rate of 2.4% against 8.6% of India. Indian agriculture expanded at the rate of 5.4% while agricultural growth in Pakistan was just 1.2%. Pakistan’s GDP per capita increased by 0.24 per cent, virtually no growth at all against Indian per capita GDP rise by about seven per cent.


 
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9 Responses »

  1. These are all fruits of your so-called democracy. Remember Musharraf and the economy of Pakistan at that time?

  2. @Gul Riaz you are right, if there is enough foreign investment flowing inside Pakistan as was the case during Musharraf era we would need to print limiless money. Industralization of our economy is also important to generate growth which would result in private sector economic development. Infrastructure’s are usually built once Industries are up and running, the employment indicators would turn positive also. For all of the above we need stablility, controlling the Rupee from any further depreciation.

    We can always follow the China model which we can follow on a limited scale.


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  8. Inflation in Pakistan had slipped to a nine-year low in April despite an expansionary fiscal policy pursued by the finance ministry. There is an increase in the rate of unemployment, rise of inflation and the common man has been crippled due to the circumstances.

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