The June inflation figure, the last of the current fiscal year, was 13.8 percent, year on year, the first increase after three months of decline. In May, for example, it was 13.3 percent. This is not good new for the government, which has probably correctly identified inflation as its worst enemy, the worst eroder of support it faces. It should also note how quickly its assumptions have evaporated, and how quickly it finds itself forced to face reality. The first problem it faces is that international fuel prices, which are not in the government was obliged to raise fuel prices, which will have an inflationary effect in the days to come. The IMF also insists both on a power tariff increase, as well as further taxation measures. These also will be inflationary.
Only at its last Monetary Policy Committee meeting, the State Bank of Pakistan has decreased the interest rate to 20.50 percent from the 22 percent where it had pegged it for so long. The IMF regards the interest rate as a kind of panacea for inflation, but the role of oil prices has not been closely examined. The IMF has insisted that interest rates be kept as high as possible for as long as possible. As a result, growth has been squeezed, and one of the basic problems of the economy, the saving rate, and government spending, are sacrificed without compunction. The inflation figure might well persuade the IMF to insist on keeping it high for the foreseeable future. One of the most important components for growth in the Budget, the Public Sector Development Programme, is already being slashed at the IMF’s insistence, even though this means that Pakistan is to be condemned to anaemic growth in the financial year that began on Monday.
Average inflation of the year has been finalised at 23.4 percent, as compared to 29.2 percent of the year before. The slowdown in the decline in inflation shows that the economy is no longer overheated, and thus the money-supply approach to inflation may have run its course, leaving only intrinsic factors, like oil prices, to determine it. If that happens to be the case, the IMF has got it all wrong. The indications are that it has, and is likelier than not to drive the economy into the ground. The government must wake up before it is too late.
