Projection, in many cases, is reality. The expectation of inflation can drive inflation as much as all the factors that cause inflation in the first place. That is why much of economics is about the management of expectations. News of the government making the central banks print a particular value of notes everyday makes it to the public and the expectations of the consequences become an integral part of price and wage setting. The State Banks quarterly report, which was released the other day, expresses concerns about how ingrained the expectations of inflation have become in the economy.
However, these expectations, as the example of the state banks printing spree served to illustrate, are not unfounded. Inflation is being caused by real factors as well. The rising global oil prices are driving prices upwards. Considering the centrality of thermal power plants in our energy profile, that is to drive electricity costs higher as well. And though the inflationary effects of the devastating floods are beginning to dissipate, they are still being felt. Some of the inflation, it has to be believed, is being fuelled by good news. The rising affluence in the agricultural peripheries, brought about by the rising prices in the international agricultural goods markets, has spurred economic activity in the rural areas and growth. The latter, theory tells us, is always accompanied by a measure of inflation. The same also applied to large scale manufacturing, which has faced the intermittent power outages surprisingly well.
The central banks observation about the revenue position is in accordance with just about every recent analysis on Pakistani public finance there is. The governments inability to increase its revenue and curtail its expenditures is something that needs to be worked upon on a priority basis. But the government has been working hard to achieve a consensus on both tax reform and subsidy curtailment. This is a front where the political opposition needs to be blamed more than any supposed incorrect prioritisation by the government.
