Unaddressed for long, numerous imbalances in many market
economies, emerging or developed — aggravated by global
geopolitics and the war in Ukraine — have turned into grave crises.
But a high rate of current, unsubdued, persisting inflation has
triggered politically the most sensitive ‘cost-of-living-crisis’
worldwide.
In Pakistan, inflation has become a crucial political issue because of its
possible fallout on the coming provincial and national elections preceded by
local body polls. And yet there is no clear indication of how the cost-of-living-
crisis will be resolved.
The headline inflation is likely to increase temporarily, may remain elevated
throughout the next fiscal year and is expected to fall to the targeted 5-7 per
cent level by the end of 2023-24, says the State Bank Monetary Policy
Statement (MPS) issued on May 23. The headline inflation rose from 12.7 per
cent year-on-year in March to 13.4pc in April.
In 2022-23, the economic growth is estimated at half the rate of 7-8pc that the
economists usually maintain is required for putting the idle manpower to
work and reducing poverty. The central bank expects the economy to grow at
3.5-4.5pc in FY23 on the back of tight monetary policy and stipulated fiscal
consolidation, from the estimated 6pc this fiscal year. The World Bank is of
the view that Pakistan’s economy cannot grow more than 4pc on a sustainable
basis.
Economist magazine http://www.pharmacistlegacy.com/magazines/mgi6.htm
During the pandemic, there was a new billionnaire every 30 hours while a
million people worldwide fell into extreme poverty every 33 hours, according
to Oxfam
Business leaders have criticised the central bank’s policy rate hike by 1.5 basis
points to 13.75pc, arguing that it would discourage investment and
industrialisation by increasing the cost of doing business.
According to the National Accounts Committee (NAC), the initial estimate of
the investment-to-GDP ratio was at 15pc of GDP, the highest during PTI’s
tenure but, according to an analyst, the ratio was below the level left behind by
the PML-N government in 2018. The private sector investment remained at
last year’s level of 10pc of GDP while fixed investment improved slightly to
13.4pc of GDP.
However in a little more than 10 months (July 1, 2021, and May 6, 2022)
banks had made fresh net lending to the private sector of about Rs1.296
trillion against Rs421 billion, indicating a growth in the economy. Apart from
hiking the policy rate on May 23, the central bank has also enhanced the rates
for concessionary working capital for exporters and on loans for purchasing
machinery to 7pc and 7.5pc to lessen distortions. This is expected to curb
domestic demand as well as inflation.
Despite lower savings and investment than targeted by policymakers, the NAC
has projected economic growth of 6pc for this fiscal year. The growth is stated
to be consumption-led with domestic demand being met substantially from
foreign-debt financed imports. The PML-N government has announced
temporary curbs on imports of non-essential items — measures not seen
enough by many.
The savings-to-GDP ratio fell steeply to 11.1pc in the current fiscal year from
the previous year’s level of 14pc. The ratio is stated to have deteriorated due to
the current account deficit.
Initial moves have also been made by the government to encourage export-
oriented investment. During his visit to Karachi on May 20, Prime Minister
Shehbaz Sharif announced the immediate removal of the 17pc general sales
tax on solar panels imposed by the PTI government, arguing that it is the only
way forward to reduce the country’s oil imports. He also stressed the need for
a compulsory solar geyser policy for every household.
Finance Minister Miftah Ismail recently offered tax incentives to multinational
companies if they present him with a plan for exports. So far foreign
companies have invested in import substitution industries as they have long
maintained they need incentives for their products to be competitive in the
export market. Foreign direct investment fell 1.6pc to $1.45bn in 10months of
the current fiscal year. The inflow in April was $170.6 million, almost
unchanged from a year ago.
Prime Minister Sharif also expects an investment of $1bn by Saudi Arabia for
the installation of a desalination plant in Karachi to meet the growing water
shortage in the city. He is confident that the plant would take off soon as the
investment guarantee has to be used within 2022. Saudi Arabia wants it to be
the biggest desalination plant in the region.
But challenges are enormous. Pakistan is among the 12 countries which are
deemed more exposed to the ongoing war in Ukraine than others, says the
United Nations Economic and Social Commission for Asia and the Pacific
(UNESCAP).
In its latest policy brief on “The War in Ukraine-Impacts, Exposure and Policy
Issues in Asia and Pacific”, UNESCAP reports that these 12 countries could be
hit hardest because they were exposed to higher energy and food prices,
smaller external financial inflows, rising financial costs, and a sudden shift in
business sentiments. (Pakistan may have to spend $1.5bn on wheat imports to
offset supply disruptions caused by the Ukraine war. Wheat output is
estimated at 26.9m tonnes this season, less than the target of $28.9 tonnes.)
The UNESCAP says surging global energy and food prices are pushing up
consumer inflation which will disproportionately hurt poor households. At the
same time, rising interest rates and surging inflation are impairing household
balance sheets, investors’ confidence and the government’s ability to service
debt.
Reader’s Digest Asia http://www.kutab.com.pk/magazines/mgi1.htm
People have become familiar with the idea of a cost-of-living-crisis but that
does not begin to capture the gravity of what may lie ahead, wrote an analyst
in The Economist recently. The war in Ukraine is battering a global food
system weakened by Covid-19, climate change and energy shock.
Ukraine’s export of grains and oilseeds have mostly stopped, Russia’s
hampered and India has suspended wheat exports. A BBC report says that the
high cost of staple foods has already raised the number of people who can not
be sure of getting enough to eat by 440m, to 1.6bn. Nearly 250m are on the
brink of famine.
The charity Oxfam which issues a report on inequality during the Davos forum
every year claims that over the last two years a new billionaire had been
created every 30 hours. On the other end of the income spectrum, Oxfam
expects around 1m people to fall into extreme poverty every 33 hours this year,
according to BBC’s television channel quoting the charity’s international
executive director Gabriela Butcher.