The inflation figure for December was 4.1 percent, the lowest in 40 months, and belied the State Bank of Pakistan’s prediction of an uptick in the inflation rate. With inflation hitting 4.9 percent in November, such a prediction was in line with Pakistan’s historical inflation rate, but December has yielded an even lower rate, which has meant that Pakistan has moved from stagflation, when high inflation is accompanied by low growth, to a deflation, where prices have started to come down, but growth also remains low.
There are some positives for the government when prices remain low, not least the inevitable relief that will come when the interest rate comes down, and debt servicing shrinks. After all, from a high of 22 percent, the interest rate has come down to 13 percent. With inflation at 4.1 percent, the interest rate will have to come down further, probably to single digits. It can be noticed that the SBP is running out of wiggle room. One of the more misleading positives would be the inevitable rally on the stock market, as interest rates go down, and stocks’ returns become better investments. That rally seems to have already started, leading to the impression that stocks may be over-valued. One negative for the government is that lower inflation means that there will be a lower nominal growth of the economy. Apparently, the FBR’s collection projection was based on 16% nominal growth, which is now down to eight percent. The FBR has therefore suffered a shortfall of about Rs 386 million so far. Negative growth in large-scale manufacturing has not helped either. Going after existing taxpayers will not help, as before. The FBR will have to go after ensuring the end of leakages if the targets are to be met. At the moment, any savings on debt servicing are about the same as the CBR shortfall. This seems a singularly unimaginative way of utilizing that windfall.
While the government may use this latest decline as a debating point, it might also keep in mind that it will not profit politically unless the consumer feels the benefit. It should remember that the voter is notoriously ungrateful. Only if his income increases more than prices, if he is in employment, will he be impressed by the quality of economic management. Also, the government must ensure that inflation remains low for a long time, before the voter notices. Ans then, to avoid a recession, it must ensure strong growth. Inflation is very important, but there is much else.
