Unprecedented inflation and its causes

By Mohammad Ishaq Dar

October 25, 2021

Sky-high increase in prices of essential commodities of daily use: There is hue and cry across the country
due to an unprecedented hike in the prices of essential commodities of daily use in almost every
household. A comparison of few such items indicating the price increase over the first three years (Aug
2018 vs Sept 2021) of PTI government would give a clearer picture; for example:

Flour price per kg increased from 35 to 75 (114pc), sugar from 55 to 110 (100pc), ghee from 140 to 340
(142pc), rice from 80 to 160 (100pc), masoor pulse from 113 to 183 (62pc), mash pulse from 145 to 250
(72pc), moong pulse from 113 to 176 (56pc), mixed vegetables from 45 to 110 (144pc), milk from 90 to
130 (44pc), yogurt from 100 to 220 (120pc), eggs from 120 to 180 (50pc), beef from 350 to 800 (129pc),
and mutton from 740 to 1500 (103pc).

Electricity price per unit has gone up from 2 to 6 (200pc) for life-line consumers, and from 8 to 24 (200pc)
for others. Medicines prices have increased in the range of 250pc to 400pc.

Fuel to fire is supplied continuously by the PTI government to retain high inflation since it came to power
in 2018, as it has been witnessed a week ago through announcement of official increase in the prices of
petroleum products and cooking oil together with levy of more regulatory customs duties on large
number of imported items.

Trajectory of Inflation Indices The trajectory of prices indices also paint a bleak picture when compared
that of PTI’s three years 2018 to 2021 with immediately preceding PMLN’s three years 2015 to 2018.
Consumer Price Index (CPI) registered 10.94pc increase (2.86+4.16+3.92) during 2015-18 as opposed to
27.36pc increase (7.34+11.12+8.90) during 2018-21; Sensitive Price Index (SPI) rose by 3.73pc
(1.31+1.57+0.85) as against 35.82pc increase (5.15+16.84+13.83); and Wholesale Price Index (WPI)
recorded 6.46pc increase (-1.05+4.04+3.47) as opposed to 32.44pc increase (11.97+11.06+9.41) during
the three year period 2015-18 and 2018-21, respectively.

These figures give a very grim picture of how miserably the PTI government had failed in maintaining the
price stability which it inherited in 2018 from the PMLN government.

In the last three years, most indices indicated double digit inflation during the period 2018-2021,
compared to low single digit maintained by the PMLN during the period 2015-18. A simple addition of
annual inflations across all the three indices shows the PTI’s inflation on an average was 10pc per annum
or more against less than 3pc of PMLN’s.

Most worrying area is food inflation, which was under 2pc when the PMLN government completed its
term in 2018, but it reached 24pc in rural and 19pc in urban areas in Nov-Dec 2020 during the4 PTI
government and unfortunately it still remains high in double digits.
The latest annualised inflation number of 14.48pc for last week released by the Pakistan Bureau of
Statistics (PBS) is extremely worrisome as it indicates that there is no hope for the containment of this
menace in the near future.

Follies of PTI government

The sufferings of Pakistanis due to high inflation during 2018-21 is not surprising when viewed in the
backdrop of the major follies committed by the PTI government in its first three years, which are briefly
discussed below:

1. Massive devaluation

Rupee/dollar devaluation has always contributed towards inflation in the economic history of Pakistan.
General (retd) Musharraf’s era witnessed devaluation of Rs30 (82-52) during 1999-2008, PPP’s 2008-13
had Rs17 (99-82), PMLN’s 2013-18 ended up with Rs 17 (116-99) and in the caretaker’s three months Rs 7
(123-116). But PTI government has set a bleak record of devaluation of Rs 50 (173-123) in its three years
2018-21 period.

At the outset, the PTI government exaggerated the ill effects of current account deficit. Consequently, it
undertook a massive devaluation of 40pc in two years which resulted in steep decline in current account
from $19.2 billion in 2017-18 to merely $2 billion in 2020-21. This was nothing short of slaughtering and
grounding the economy. In the first two years (2018-2020), the LSM declined by 3pc and 10pc,
respectively, as importing industrial raw material became too expensive.

Sadly, the PTI team failed to comprehend that loss in the value of rupee makes life of common man
miserable, as it is always one of the major causes of high inflation.

The fact that this was an unthoughtful policy is evident from the fact that much of adjustment fell on
imports from $56 billion to $43 billion, a knock down of 25pc in imports. Ostensibly, this was done in the
name of removing the import bias in exchange rate hurting exports as propagated by spin-wizards who
have long disappeared from the scene on this account. The exports in PTI’s three years have increased
from $24.8 billion in 2017-18 to $25.6 billion in 2020-21. So all told, increase in exports in three
completed fiscal years is only $800 million. Is this sum a worthwhile compensation for a staggering 40pc
devaluation of rupee? It would be hard to find another example of such colossal loss of national resources
and the ill effects that the nation still continues to suffer.

The rupee devaluation also led to an unbearable rise in domestic prices as most critical imports such as
petroleum products, electricity, gas and edible oil became very expensive and contributed to high
inflation. In addition, the foreign (external) debt and its interest payments also became unbearable. In
addition, an amount of over Rs4,000 billion has been the capital loss through increase in the public debt
due to devaluation.

2. Interest rate

Another folly committed by the PTI government was the steep rise in interest rate. The policy rate was
almost doubled within a period of one year, from around 6% to 12% and subsequently to 13.25%, where
it was kept for nearly a year. It is claimed by the State Bank of Pakistan (SBP) that it was targeting headline
inflation as well as forward looking policy to remain ahead of inflation. These two things resulted in a
massive rise in interest payments, which jumped from Rs1.3 trillion in 2017-18 to Rs2.6 trillion in 2019-20,
in just first two years of PTI’s government. The shift led to around 5pc real interest rate (difference
between policy rate and headline inflation) for about one-and-a-half years (Nov 2018 to May 2020). This
alone gave an estimated benefit to the banks and financial institutions of Rs450 billion during this period.
High interest expenditure resulted in increased fiscal deficit which created a compounding effect of
increase in public debt. The fiscal deficit of 8.9pc and 8.1pc was recorded in the first two years of the PTI
government and the Public debt, as percentage of GDP, rose from PMLN’s 72.5pc in 2017-18 to PTI’s 85pc
and 87pc in 2018-19 and 2019-20, respectively.

Following the global outbreak of Covid-19 pandemic when the whole world reduced the interest rates to
support their economies and people, the SBP reluctantly reduced in phases the policy interest rate from
13.25pc to 7pc within a quarter, sometime holding multiple monetary policy committee (MPC) meetings
within a month which are otherwise held once in every two months. This lowering of interest rate
moderated the rising interest payments which grew only by 5pc during 2020-21 and the fiscal deficit
reduced to 7.1pc; Public Debt to GDP accordingly adjusted downwards to 83.5pc. But this fiscal deficit is
still too high for controlling inflation. In its presence, the PTI government is deluding itself by thinking it is
focusing to control inflation.

3. Heavy taxation

The PTI government happily adopted the budget presented by the PMLN government in May 2018,
except for cosmetic changes, but it failed to achieve any of the key budgetary targets. The fiscal deficit, as
noted above, ended up at 8.9pc although it was budgeted at 4.9pc.

When the government finally decided to enter into an IMF programme in June 2019, the Fund set an
unrealistic target for FBR revenue collection. In 2018-19, FBR collection was only Rs3,829 billion even
though the target was Rs4,300 billion, indicating a negative revenue growth after 23 years. Despite such
low yields, the PTI team agreed with the IMF to achieve a tax target of Rs5,550 billion for 2019-20, which
amounted to a nominal increase of Rs1,721 billion or 4.5pc of GDP, which was simply ridiculous. For this
purpose, new taxes of Rs735 billion were imposed on the people in order to achieve said unrealistic
revenue goal. The FBR collection for 2019-20 was Rs3,998 billion which included Rs100 billion
supplementary grant from the federal government for payment of tax refunds which otherwise were due
to be paid by the FBR out of its revenue collection; therefore the actual FBR collection was Rs3,898 billion.
This was a horrendous revenue performance which turned out the budget deficit to 8.1pc. During the
third fiscal year 2020-21, there has been an increase of 21pc in taxes collection, making an average annual
growth of 7pc in the first three years of the PTI.

While the PTI government failed to achieve its tax targets, yet they contributed heavily, through interest
rate hike and massive devaluation, in accelerating the price increases across the board resulting in high
inflation. Concurrently, it had an overall negative effect on GDP, the growth.

4. Mafias and scams

Never in Pakistan’s history the nation has witnessed mega scams run by mafias associated with the
government of the day such as sugar, flour, petroleum products and medicines, etc., which jacked up the
prices of these items to an extent where people have been forced to pay annually thousands of billions of
rupees extra to buy the same quantities of goods and utilities.

Conclusion

Buoyed by some growth in 2020-21, the PTI government has already embarked on an expansionary path.
In two months (July-August 2021), the current account deficit has already shot up to $2.3 billion. They also
want to remain in the IMF programme. But then the Fund would demand austerity by slowing down the
economy, leading to further rise in electricity prices, cutting down PSDP and more adjustments in interest
and exchange rates.

With such changes, the goals of accelerating the growth and controlling inflation would be off the table.

Non-existence of prudent, pro-active and constructive economic policy well supported by fiscal discipline
and anti-inflationary measures has landed the people in a state of unbearable inflation.

The afore-discussed major mistakes, all PTI government’s own making, have contributed to an
unprecedented hike in inflation, particularly prices of food items and utilities. With follies made by the PTI
government, there is no case for the PTI to complain about imported inflation. The pain and misery
inflicted on hapless people in the first three years of PTI’s government under the leadership of Imran Khan
through insane 40pc rupee devaluation, imprudent interest rate management, heartless heavy taxation
and mafias-pushed price increases of essential commodities has caused severe unrest among people who
have started protesting throughout the country against the unparalleled inflation in the history of
Pakistan.

The author, a UK Fellow Chartered Accountant, is former finance minister of Pakistan and former leader of
the opposition in the Senate of Pakistan. Twitter: @MIshaqDar50

October 25, 2021

Sky-high increase in prices of essential commodities of daily use: There is hue and cry across the country
due to an unprecedented hike in the prices of essential commodities of daily use in almost every
household. A comparison of few such items indicating the price increase over the first three years (Aug
2018 vs Sept 2021) of PTI government would give a clearer picture; for example:

Flour price per kg increased from 35 to 75 (114pc), sugar from 55 to 110 (100pc), ghee from 140 to 340
(142pc), rice from 80 to 160 (100pc), masoor pulse from 113 to 183 (62pc), mash pulse from 145 to 250
(72pc), moong pulse from 113 to 176 (56pc), mixed vegetables from 45 to 110 (144pc), milk from 90 to
130 (44pc), yogurt from 100 to 220 (120pc), eggs from 120 to 180 (50pc), beef from 350 to 800 (129pc),
and mutton from 740 to 1500 (103pc).

Electricity price per unit has gone up from 2 to 6 (200pc) for life-line consumers, and from 8 to 24 (200pc)
for others. Medicines prices have increased in the range of 250pc to 400pc.

Fuel to fire is supplied continuously by the PTI government to retain high inflation since it came to power
in 2018, as it has been witnessed a week ago through announcement of official increase in the prices of
petroleum products and cooking oil together with levy of more regulatory customs duties on large
number of imported items.

Trajectory of Inflation Indices The trajectory of prices indices also paint a bleak picture when compared
that of PTI’s three years 2018 to 2021 with immediately preceding PMLN’s three years 2015 to 2018.
Consumer Price Index (CPI) registered 10.94pc increase (2.86+4.16+3.92) during 2015-18 as opposed to
27.36pc increase (7.34+11.12+8.90) during 2018-21; Sensitive Price Index (SPI) rose by 3.73pc
(1.31+1.57+0.85) as against 35.82pc increase (5.15+16.84+13.83); and Wholesale Price Index (WPI)
recorded 6.46pc increase (-1.05+4.04+3.47) as opposed to 32.44pc increase (11.97+11.06+9.41) during
the three year period 2015-18 and 2018-21, respectively.

These figures give a very grim picture of how miserably the PTI government had failed in maintaining the
price stability which it inherited in 2018 from the PMLN government.

In the last three years, most indices indicated double digit inflation during the period 2018-2021,
compared to low single digit maintained by the PMLN during the period 2015-18. A simple addition of
annual inflations across all the three indices shows the PTI’s inflation on an average was 10pc per annum
or more against less than 3pc of PMLN’s.

Most worrying area is food inflation, which was under 2pc when the PMLN government completed its
term in 2018, but it reached 24pc in rural and 19pc in urban areas in Nov-Dec 2020 during the4 PTI
government and unfortunately it still remains high in double digits.

The latest annualised inflation number of 14.48pc for last week released by the Pakistan Bureau of
Statistics (PBS) is extremely worrisome as it indicates that there is no hope for the containment of this
menace in the near future.

Follies of PTI government

The sufferings of Pakistanis due to high inflation during 2018-21 is not surprising when viewed in the
backdrop of the major follies committed by the PTI government in its first three years, which are briefly
discussed below:

1. Massive devaluation

Rupee/dollar devaluation has always contributed towards inflation in the economic history of Pakistan.
General (retd) Musharraf’s era witnessed devaluation of Rs30 (82-52) during 1999-2008, PPP’s 2008-13
had Rs17 (99-82), PMLN’s 2013-18 ended up with Rs 17 (116-99) and in the caretaker’s three months Rs 7
(123-116). But PTI government has set a bleak record of devaluation of Rs 50 (173-123) in its three years
2018-21 period.

At the outset, the PTI government exaggerated the ill effects of current account deficit. Consequently, it
undertook a massive devaluation of 40pc in two years which resulted in steep decline in current account
from $19.2 billion in 2017-18 to merely $2 billion in 2020-21. This was nothing short of slaughtering and
grounding the economy. In the first two years (2018-2020), the LSM declined by 3pc and 10pc,
respectively, as importing industrial raw material became too expensive.

Sadly, the PTI team failed to comprehend that loss in the value of rupee makes life of common man
miserable, as it is always one of the major causes of high inflation.

The fact that this was an unthoughtful policy is evident from the fact that much of adjustment fell on
imports from $56 billion to $43 billion, a knock down of 25pc in imports. Ostensibly, this was done in the
name of removing the import bias in exchange rate hurting exports as propagated by spin-wizards who
have long disappeared from the scene on this account. The exports in PTI’s three years have increased
from $24.8 billion in 2017-18 to $25.6 billion in 2020-21. So all told, increase in exports in three
completed fiscal years is only $800 million. Is this sum a worthwhile compensation for a staggering 40pc
devaluation of rupee? It would be hard to find another example of such colossal loss of national resources
and the ill effects that the nation still continues to suffer.

The rupee devaluation also led to an unbearable rise in domestic prices as most critical imports such as
petroleum products, electricity, gas and edible oil became very expensive and contributed to high
inflation. In addition, the foreign (external) debt and its interest payments also became unbearable. In
addition, an amount of over Rs4,000 billion has been the capital loss through increase in the public debt
due to devaluation.

2. Interest rate

Another folly committed by the PTI government was the steep rise in interest rate. The policy rate was
almost doubled within a period of one year, from around 6% to 12% and subsequently to 13.25%, where
it was kept for nearly a year. It is claimed by the State Bank of Pakistan (SBP) that it was targeting headline
inflation as well as forward looking policy to remain ahead of inflation. These two things resulted in a
massive rise in interest payments, which jumped from Rs1.3 trillion in 2017-18 to Rs2.6 trillion in 2019-20,
in just first two years of PTI’s government. The shift led to around 5pc real interest rate (difference
between policy rate and headline inflation) for about one-and-a-half years (Nov 2018 to May 2020). This
alone gave an estimated benefit to the banks and financial institutions of Rs450 billion during this period.
High interest expenditure resulted in increased fiscal deficit which created a compounding effect of
increase in public debt. The fiscal deficit of 8.9pc and 8.1pc was recorded in the first two years of the PTI
government and the Public debt, as percentage of GDP, rose from PMLN’s 72.5pc in 2017-18 to PTI’s 85pc
and 87pc in 2018-19 and 2019-20, respectively.

Following the global outbreak of Covid-19 pandemic when the whole world reduced the interest rates to
support their economies and people, the SBP reluctantly reduced in phases the policy interest rate from
13.25pc to 7pc within a quarter, sometime holding multiple monetary policy committee (MPC) meetings
within a month which are otherwise held once in every two months. This lowering of interest rate
moderated the rising interest payments which grew only by 5pc during 2020-21 and the fiscal deficit
reduced to 7.1pc; Public Debt to GDP accordingly adjusted downwards to 83.5pc. But this fiscal deficit is
still too high for controlling inflation. In its presence, the PTI government is deluding itself by thinking it is
focusing to control inflation.

3. Heavy taxation

The PTI government happily adopted the budget presented by the PMLN government in May 2018,
except for cosmetic changes, but it failed to achieve any of the key budgetary targets. The fiscal deficit, as
noted above, ended up at 8.9pc although it was budgeted at 4.9pc.

When the government finally decided to enter into an IMF programme in June 2019, the Fund set an
unrealistic target for FBR revenue collection. In 2018-19, FBR collection was only Rs3,829 billion even
though the target was Rs4,300 billion, indicating a negative revenue growth after 23 years. Despite such
low yields, the PTI team agreed with the IMF to achieve a tax target of Rs5,550 billion for 2019-20, which
amounted to a nominal increase of Rs1,721 billion or 4.5pc of GDP, which was simply ridiculous. For this
purpose, new taxes of Rs735 billion were imposed on the people in order to achieve said unrealistic
revenue goal. The FBR collection for 2019-20 was Rs3,998 billion which included Rs100 billion
supplementary grant from the federal government for payment of tax refunds which otherwise were due
to be paid by the FBR out of its revenue collection; therefore the actual FBR collection was Rs3,898 billion.
This was a horrendous revenue performance which turned out the budget deficit to 8.1pc. During the
third fiscal year 2020-21, there has been an increase of 21pc in taxes collection, making an average annual
growth of 7pc in the first three years of the PTI.

While the PTI government failed to achieve its tax targets, yet they contributed heavily, through interest
rate hike and massive devaluation, in accelerating the price increases across the board resulting in high
inflation. Concurrently, it had an overall negative effect on GDP, the growth.

4. Mafias and scams

Never in Pakistan’s history the nation has witnessed mega scams run by mafias associated with the
government of the day such as sugar, flour, petroleum products and medicines, etc., which jacked up the
prices of these items to an extent where people have been forced to pay annually thousands of billions of
rupees extra to buy the same quantities of goods and utilities.

Conclusion

Buoyed by some growth in 2020-21, the PTI government has already embarked on an expansionary path.
In two months (July-August 2021), the current account deficit has already shot up to $2.3 billion. They also
want to remain in the IMF programme. But then the Fund would demand austerity by slowing down the
economy, leading to further rise in electricity prices, cutting down PSDP and more adjustments in interest
and exchange rates.

With such changes, the goals of accelerating the growth and controlling inflation would be off the table.

Non-existence of prudent, pro-active and constructive economic policy well supported by fiscal discipline
and anti-inflationary measures has landed the people in a state of unbearable inflation.
The afore-discussed major mistakes, all PTI government’s own making, have contributed to an
unprecedented hike in inflation, particularly prices of food items and utilities. With follies made by the PTI
government, there is no case for the PTI to complain about imported inflation. The pain and misery
inflicted on hapless people in the first three years of PTI’s government under the leadership of Imran Khan
through insane 40pc rupee devaluation, imprudent interest rate management, heartless heavy taxation
and mafias-pushed price increases of essential commodities has caused severe unrest among people who
have started protesting throughout the country against the unparalleled inflation in the history of
Pakistan.

The author, a UK Fellow Chartered Accountant, is former finance minister of Pakistan and former leader of
the opposition in the Senate of Pakistan. Twitter: @MIshaqDar50