The inflation surprise to the downside, and subsequent market rally, ought to be self-explanatory. Yet there are deeper issues that must be calculated, which explain why the following trading day brought bears back to the floor. CPI easing most likely owes to one of the rare bright spots in the year just ended – the government curtailed its borrowing binge in part, even retiring some of the monies taken from the central bank. However, it would be naïve of the market to expect the correction to continue in election year, hence the quick disappointment.
Markets have clearly priced in continued pressure on the reserve position and external account. Temporary government prudence on the debt matter may have pulled inflation down momentarily, but the growing fiscal deficit, fast depreciating rupee and widening trade losses mean prices are set to rise again sooner rather than later. And since only the foolish expected huge PSE losses to be checked with campaigning underway for all intents and purposes, the government’s fiscal space will remain uncomfortably tight.
Yet the current administration is in a dilemma. It might cite election compulsions for unpopular decisions. But since the present economic situation dictates that some such decisions will have a more pronounced impact on ordinary citizens than before, the exercise is more than likely to be self-defeating. In times of persistent low growth and high unemployment, official mismanagement of crucial sectors like energy has added tens of thousands to the jobless list. Already, with earning compromised and prices still high, people’s agitation is beginning to find expression on the streets. If the present state is not checked, and official apathy continues, this distress will resonate even more loudly at the ballot. The government may not have employed the best strategy at its disposal. The country needs bold leadership. There’s a hint there for top guys in Islamabad.
