Ever since the incumbent government came to power, inflation has been on the rise at a historic rate and as such has been talk of the town especially in the media and political landscape of the country. The increase in prices of all items has been phenomenal, leading to an inflation rate that has been the highest in Asia on average for the past couple of years as well as amongst the highest in the world. The reasons for this rapid increase, one of the highest and worst in the country’s history, have been discussed by all actors involved. Government officials, as has been their standard response to all challenges facing the country, have blamed it on the policies of the previous government and on the coronavirus pandemic that swept the world last year, beside a global increase in the prices of commodities we import. The opposition on the other hand has placed the responsibility on the government. Independent economists and neutral observers however believe that it is indeed a mix of both these factors that has led us to this point where there are genuine fears of an economic collapse on the scale of Lebanon and Greece if nothing is done to arrest this decline.
It is indeed true that frequent lockdowns across the globe caused by covid-19 have widely disrupted economic activities, disrupted supply chains and decreased outputs with a serious impact on commodity prices. Closure of ports for most of the previous year followed by their simultaneous opening this year have led to issues of huge backlog of containers at the ports as well as available shipping capacity, resulting in a manifold increase in freight charges. For a country like Pakistan whose imports are much higher than its exports, this has had a serious impact on the price of imported items as it is dependent on sea lines for most of its major imports like oil and scrap.
Pakistan might find itself in a similar situation as that of Lebanon, Zimbabwe or Argentina, leading to social unrest, increased crime as well as a general deformation in the country’s political and social landscape. Even though there are several measures that can be used to arrest this decline, implementing them requires political will which seems to be in short supply in the current hy led to todayabrid regime
Furthermore the lack of demand for almost two years due to lockdowns led to many manufacturers cutting down capacity and shutting plants, leading to supply side constraints as well as a decline in supply of commodities like oil and gas due to decreased industrial activity. With the reopening of the world economy the demand suddenly shot up again but the supply situation remained the same or took time to ramp up to previous levels, leading to a surge in prices. Pakistan being an import-reliant nation for many raw materials and finished products especially those related to machine and energy, imports ended up suffering more due to these factors in terms of inflation. The depreciation of the rupee due to an increased current account deficit as well as the government’s desire to negotiate a deal with the International Monetary Fund (IMF), has also led to a surge in prices of imported products which have to be bought in dollars.
The situation on food inflation however vindicates the opposition stance that the government and its mismanagement also has a major part to play in the surge of prices of daily use items such as sugar, wheat and cooking oil. Here increased taxation on imports of items such as palm oil, which is a major food import for Pakistan, has been a double-edged sword which along with increased international prices has really impacted ordinary people.
The World Bank (WB) has also stated in its recent report that increased taxation has little to no effect on Pakistan’s imports since the majority are essential items whose price is inelastic. Hence these measures only increase the burden on the general population without reducing our import bill as the government claims. There is an over-reliance on indirect taxes for running state affairs in Pakistan with almost 70 percent of our revenue coming from indirect taxes such as custom duties and sales tax which affect all income segments equally rather than distributing the burden in an equitable fashion. These taxes at import stage have been one of the major reasons for the surge in prices of imported food items.
Furthermore, measures such as exporting wheat and sugar without adequately assessing local demand and later importing same wheat and sugar at exorbitant prices has also left a serious question mark on the administration of both the Punjab as well as federal governments. The inability of the Food and Finance Ministries as well as the local administration to realize that wheat and sugar stocks were necessary to fulfill local demand, and hence they should not be exported unless surplus stock was available led to the prices of these items surging as later on the government had to import same items through expensive tenders which increased food prices in Pakistan.
A similar situation was witnessed when highly favorable LNG contracts negotiated by the previous government were scrapped solely on political considerations and now the country is importing the costliest LNG in its history from the international market. The previous contracts were long term in nature with fixed prices whereas now LNG is being imported on a container-to-container basis, which is costly as LNG prices have surged in the market.
A mix of these factors will lead to increased inflation in the coming years. It is quite likely that Pakistan might find itself in a similar situation as that of Lebanon, Zimbabwe or Argentina, leading to social unrest, increased crime as well as a general deformation in the country’s political and social landscape. Even though there are several measures that can be used to arrest this decline, implementing them requires political will which seems to be in short supply in the current hybrid regime.
Hence there is a strong likelihood unfortunately that Pakistan may continue on its journey to eventually becoming a failed state, if it isn’t a one already by the strictest definition, joining the ranks of the above mentioned countries. One can only hope that a miracle occurs at some point reversing this downward trend.
