April saw more of the punishing inflation characteristic the last couple of years, with a record 36. percent rise year-on-year. The month’s increase was 2.4 percent, and the y-o-y inflation last month was 36 percent, making the 11th month since last June that inflation was above 20 percent. The economy is not heading into hyperinflation yet. Hyperinflation is defined as over 50 percent a month. That works out at several quadrillion times a year. That is then prices change on an hourly or daily basis, not weekly or monthly.
What has made this inflation so unbearable is that it is accompanied by low growth. An indication of this came in the monthly trade figures, which showed that the trade deficit in the first nine months of 2022-2023 had shrunk 39.62 percent from $39.3 billion to $26.7 billion. This does provide some relief to economic managers worried about where to make the next payment, but it has not been achieved because of some mighty surge in exports, which have indeed shrunk 11.2 percent from $26.2 billion to $23.3 billion. Imports declined 28.4 percent from $65.5 billion to $26.9 billion. The trade volume thus shrank from $91.7 billion to $50.2 billion. That decline in commercial activity implies a severe contraction, especially in an economy where export sales lead growth. Not only are households losing their sources of income, as breadwinners become jobless, but that bread goes out of reach. The inflation news was bad enough, but the hike was on the basis of high food inflation. Not only do households have to handle loss of income, but pay more to put food on the table.
One of the main difficulties is that the path out of this lies in a massive expansion of exports, which have shrunk. That is not going to happen. The import bill can only fall so far, with the decline in the global oil price likely to translate into benefits for Pakistan. However, a disturbing fact has been the failure of consecutive interest rate hikes to tame inflation. They have probably led to contraction, and thus stagflation. The experience of half a century ago shows that interest rate hikes to tame inflation may well have caused the stagflation characteristic of the era. Interest rate hikes are always bad for business, and are a really bad idea if they don’t work either to tame inflation. The IMF wants to suggest them. The government must not fall for this, as it reflects a lack of solutions.
