Spectre of stagflation looms large

VIAWaqar Masood Khan
SOURCEBusiness Recorder
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The recent escalation between India and Pakistan has proved to be a boon for Pakistan’s international image and standing. Pakistan is rightly not gloating on this success; in a highly matured response not only has Pakistan wasted no time in releasing the pilot of downed MiG 21 but gave an unequivocal message to the world that it had no desire to escalate tensions and invited India to sit across the table to discuss all issues including Kashmir to reduce the chances of conflict in the region.

The occasion provided a rare opportunity of national unity. All political parties supported the government and lauded the preparedness of the armed forces and for their successes in thwarting the Indian aggression.

Conflict is not good for economics. There is not only loss of output but a great deal of cost of fighting the conflict. Undoubtedly, in an already difficult economic state, recent escalation would add to our economic woes. Mercifully, hostilities were short lived and hence the cost would be limited. However, as most analysts say, the state of high alert would continue until elections are held in India, which means nearly middle of April. So far, it is reported that Pakistan Air Force (PAF) has sought a supplementary grants of Rs.8 billion. This is not a major burden, but more demands could be in the pipeline which may have sizeable impact on fiscal balance. This extra expenditure has to be met through internal adjustments and not by increasing the deficit otherwise it will have implications for an already strained economy.


But our greater concern is the general state of economy, which, we are afraid, is drifting with every passing day. The data for 8 months is becoming available and most of them remain a cause of concern.

The headline inflation for February has jumped to 8.2%, compared to February last year. In fact, an intense surge in inflation is in witness. In January it increased to 7.2%, and in February it further increased to 8.2%. This is the highest level in more than four years as this level of inflation was last recorded in June 2014. Indeed, there are other features that make inflation emerging as the most challenging task.

Also Read: Uptick in inflation

First, the inflation is driven by non-food component of consumer basket with a weight of 67% compared to food component, which has been softening the inflation. For the second consecutive month non-food inflation was in double digits, with such groups of commodities taking the lead like rents, education fees, fuels, electricity, health (drug prices) and transport. Second, the core inflation, which is non-food and non-energy, was recorded at 8.8% and has been rising uninterruptedly for more than a year. This tells us that inflation would not be easily reversed. Third, the average inflation during Jul-Feb was recorded at 6.46%, well above the 3.8% recorded for the same period of last year and again highest in more than four years. Even more concerning is the double-digit inflation in the wholesale price index (WPI), which was recorded at 11% and has also been rising. This is an early warning indicator of future inflation in the CPI as it measures the rising cost of production.

Viewed in the above backdrop, double-digit inflation would soon be a norm and persist for at least a couple of years. This assertion is additionally supported by the following factors. First, the oil prices have rebounded after touching a low of nearly $50 and have advanced to $68. Second, administrative prices continue to await their passage to consumers or recognition in the budget, further pushing the process of monetization of fiscal deficit (printing of money). NEPRA and Ogra have awarded or considering awarding significant increases in prices of electricity and gas whereas the already awarded increases have not been fully allowed. Therefore, the implicit subsidies have yet to be fully provided in the budget. Once allowed – and this would eventually be approved – there would be a significant impact on the fiscal position. Third, even though some lessening of SBP financing for budget had been witnessed in the last few weeks, thanks mainly to revival of government picking longer maturity bonds in auction, the trend is reversed as the level of borrowing from SBP rose to Rs 6.6 trillion from Rs 5.6 trillion a week earlier. The monetary hangover is thus continuing to build and would impact inflation with considerable legged effects.

On the other side, most of the developments on the real sector are not promising. First, the overall Kahrif crops (cotton, sugarcane and rice) have been less than the target thus negatively impacting the agriculture performance, which would not be recouped from Rabi crops even if they were to perform as per the target. The large scale manufacturing sector has posted a negative growth of 1.53% which is one of the worst performances in at least six years. Some of the leading industries showing negative growth include food, beverages and tobacco (-3.92%);automobile (3.63%); cement (1.6%); petroleum products (4.9%); pharmaceutical (9.95%) and iron and steel (7.56%). Clearly, production slow-down in many of these products, such as cement, iron and steel and petroleum products, is indicative of deeper slow-down in the economy.

Under the circumstances, we have the classic conditions of stagflation where prices are rising and output is falling. To be sure, we may still have some growth in the economy, but the growth rate would decline. The estimates from different agencies are in the range of 3-4%, with most showing it in the lows of 3%.

It is not surprising that the Finance Minister, in a meeting of the National Committee’s Finance Committee, has warned the public that a significant amount of inflation is in store that it would be painful. In these columns, we have been articulating consistently this point for quite some time. It may be realized that the stored inflation would be released from two sources, namely policy adjustments such as in administrative prices and international prices. For the latter, government should commit that it would not withhold any amount of increased petroleum prices as would be dictated by international prices. For the policy adjustments, the best occasion would be to make them part of the IMF programme so that the full benefits accrue from such adjustments. It was heartening to hear from the Finance Minister that the differences with IMF have narrowed. The ideal occasion to do the programme would be at the time of the next budget, which is only a few months away.

(The writer is former finance secretary)


(This news/article originally appeared in Business Recorder on March 15th, 2019)

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