ISLAMABAD – Pakistan’s crippling inflation rate has left trader Mohammad Farouk with a painful task at the end of each day – throwing out a large quantity of his fruits and vegetables because it’s too expensive to sell. Soaring prices also mean he often has to purchase stocks on credit from wholesalers.
“We can’t make money anymore because prices have been high for so long,” said Farouk, sitting beside other idle merchants, warming their hands over a fire burning in a large can.
“We are losing big profits. I wish the government would help. They are just stuffing their pockets with the country’s money.” Pakistan is saddled with a long list of troubles. A Taliban insurgency, rampant poverty, corruption and power cuts are just a few. Inflation is fast becoming one of the most potentially explosive problems for the unpopular government.
Pakistan’s central bank increased its key policy rate to 14 percent in November, its third consecutive hike in six months because of persistent inflation due primarily to government borrowing from the State Bank of Pakistan. Other factors fuelling prices include the damage caused by the summer floods, estimated at around $10 billion, to crops and related industries. At the same time, wages have not kept pace with prices rises, making it harder for ordinary Pakistanis to survive. According to some statistics, more than 60 pct of the population lives on less than $2.0 a day.
It’s not just ordinary Pakistanis who are frustrated. Pakistan’s economic lifeline – the International Monetary Fund (IMF) – is losing patience with what it sees as an intransigent political leadership.
Inflation stood at single digits for many years. But Pakistanis have been hit with an average inflation rate of 15 percent over the past three fiscal years. Economists say reckless government policies are likely to keep it high.
Cash-strapped Pakistan finances its deficit through heavy borrowing from the central bank, which is then forced to print money. Uncontrollable forces, like a spike in global commodities prices, add to inflationary pressures. Pakistan’s consumer price index rose 15.46 percent in December from a year earlier.
The Pakistan People’s Party (PPP)-led government doesn’t have the political courage to take measures such as imposing a new sales tax demanded by the IMF to ease the fiscal deficit, analysts and economists say, making it impossible to tame inflation. The administration set a dangerous precedent this month.
To lure back an estranged ruling coalition partner and appease opposition parties, it reversed a fuel price hike, angering ally Washington, which says Pakistan must have economic and political stability to support its global war in militancy. The decision will force the government to fund subsidies by again borrowing from the central bank. That will fuel inflation and further expose the government to criticism from its political enemies, who sense an opportunity for scoring points but who have offered no alternatives. “The opposition and some of the PPP’s coalition partners have now woken up to the reality that economic issues are very popular populist issues in Pakistan and are very useful sticking points against the current government,” said Eurasia Group analyst Maria Kuusisto.
Opposition parties, and even some members of the ruling coalition, fiercely oppose IMF-recommended reforms, saying they will hurt ordinary Pakistanis. But that will only prolong their suffering. Pakistanis have watched the price of tomatoes jump 30.21 percent in December. Cooking oil was up 4.17 percent and eggs rose by 10 percent over the previous month, official figures show. The IMF – which is keeping Pakistan’s economy afloat with a $11 billion loan that averted a balance of payments crisis in 2008 – says only bold reforms can really help Pakistanis, by strengthening the economy in the long run. In Pakistan, however, political expediency often takes precedence over wise economics in key sectors like agriculture, which accounts for over 21 percent of the GDP. Current inflationary pressures in the agriculture sector can be traced back to a PPP decision in 2008 to sharply raise the price it pays to farmers for wheat to encourage them to grow more, critics say. “The bottom line is inflation is here to stay for at least the next two years,” said Sakib Sherani a former senior economic adviser to the government.
