The recent abrupt rise in inflation more pronounced in both in rich and developing economies has been found badly effecting disadvantaged segments of their population, thus failing all efforts to combat rising inequities being one of the most focused target among 17 goals of SDGs to be achieved by 2030. The situation demands vigorous efforts on the part of countries for setting up explicit inflation targets.
Global Financial meltdown of 2008 which continued to persist until recently and thereafter ravages of COVID pandemic and threat of stagflation situation hovering round majority of emerging and developing economies resultant of Russian and Ukraine war crisis adversely impacting prices of commodities and oil all over the globe.
Developing economies, Pakistan in particular, are experiencing soaring prices and sluggishness creeping in their economies due to steep rise in oil prices internationally. They are faced with common scenario of depleting foreign exchange reserves, depreciating currency value and slowing down of economic growth, which are the characteristics of stagflation. The environment relating to stagflation is more visible in case of Pakistan. Despite drastic efforts by successive governments since end of the last century to turn around the economy through structural adjustment programs and all out efforts geared to improve all economic growth indicators, the continuously rising oil prices for the last two years and unbridled growth in imports are going to play havoc with country’s economy.
Rising import bill due to continuous rise in oil prices and unchecked import of non essential items and uncalled for government move to subsidize oil prices for benefit of consumers is gradually depleting foreign exchange reserves and also fiscal deficit is inching up. The inflation that was contained at the level 9 to 10 percent until 2018 has crossed 15% mark lately. The rupee has depreciated by 30% against dollar and other strong currencies (euro and pound sterling) in last three years despite State Bank’s intervention through selling dollars in the market and also curbing the activities of exchange companies operating in the country to stop dollarisation to stabilise rupee.
After subsiding threat of COVID pandemic, the apprehension of the country’s exposure to more external shocks due to steep rise in oil prices particularly causing fuel and energy shortage impacting adversely all sectors of economy. Besides that internal political turmoil creating uncertainty towards achieving desired economic growth rate and efforts not only to set right dwindling exports but also to expand export market to untouched destination seems to be going in vain. Resultantly trade deficit continue to increase thus presently standing at US dollar 30.52 billion.
Only during nine months of current fiscal years it has increased by $20.8 billion. Continuous increase in textile exports global market share of countries like China, India and Bangladesh is yet another threat adding to trade deficit. Liberalisation of bank credit particularly for private sector instead of boosting productive investments and development of infrastructure has unfortunately been channelled into speculative investments in the area of real estate, unrealistic stock exchange activity and unfair trading in consumer items.
In order to curb speculative spending State Bank of Pakistan has drastically raised the discount rate, but it is not likely to bring desired results due to adverse impact on overall economic activity and ongoing political uncertainty. Apart from that absence of desired industrial infrastructure soaring prices of energy due to oil crisis and removal of all subsidies granted y government in this area on the behest of IMF would make the process of production more costly and continue to hamper both indigenous and foreign direct investments.
As such GDP growth rate of the level of 5% envisaged for current year will remain a distant dream. Similar trend is visible in case of highly developed economies. The credit boom emerging in USA since 2014 channelled billions of dollars in technologies and real estate leaving aside other sectors of economy.
Investment in infrastructure remained under funded and growth rate of economy further ravaged by pandemic is now showing downward trend. The sharp rise in unemployment level is giving signals of stagflation scenario approaching fast. In Pakistan unfair and speculative trading in real estate, food and other essential consumer items have resulted in creating more inequalities. The gap between rich and poor has further widened and size of middle class that ensures sustainability and strength of demand of goods and services produced in the country continue to shrink. Hence productive investment both from indigenous and foreign sources remains shy.
As such overall economic activity is likely to remain stagnant unless steps are taken on war footing to eliminate political uncertainty, improve law and order situation, build up necessary infrastructure and create overall investment friendly environment to attract higher foreign direct investment and prompt new indigenous investments.
Continuous rise in oil prices for the last two years and substantial increase in imports, while exports volume remaining static has resulted in creating heavy trade deficit adversely effecting exchange rate in terms of dollar and other important currencies as stated above has created a situation of galloping inflation and substantial fall in forex reserves. To remedy the situation country need to ban import of all nonessential items at least for two years and revise industrial policy with emphasis on promoting industries producing import substitutes.
Further there is need to give an impetus to domestic demand-led industrialisation and to create effective domestic demand for jobs. In rapidly growing economies of South East Asia and even some of the developed economies growth is consumer led along with emphasis on exports.
For achieving consumer oriented growth industrial policy must have greater emphasis on small and medium size enterprises (SMEs), which are mostly, labour intensive and dependable for offerings subcontracting/vendor arrangements for large scale industries business saving them from incurring additional expenditures. Further this in a way will create perennial market for SMEs.
Commercial banks recent initiative to launch various consumer financing products some backed by government to provide relief to poor class like housing finance and small loans for self-employment of youth will help boosting economic growth rate. Banks’ financing for private sector is mainly going for purchasing electronic goods and cars and vehicles, which in turn has given impetus to electronic goods manufacturing, auto assembling plants, steel cement and paints manufacturing industries, thus creating sizeable employment opportunities.
Government is trying to take care of increasing trade deficit. Apart from curbing imports, export target for current fiscal year has been set around $35 billion. If given attention by private sector investors and if congenial business environment is created for them to produce quality and value added exportable items, they will be able to compete effectively in international market despite WTO constraints. Apart from creating sizeable employment opportunities this would ensure sustainable growth of country’s forex reserves to counter external shocks of any magnitude.
In order to ensure speedy and sustainable growth in exports, country need to have greater excess to developed markets, particularly United States, China and European Union. These countries owe moral obligation to help Pakistan ward of all external shocks coming to its economy for its being used as strategic state to eradicate terrorism from the surroundings since last three decades.
Serious efforts are also needed to create more economic and trading collaborations with in the South East Asian region not only to ensure sustainability of growth in exports, but also to lessen the cost of essential items of imports like machinery and raw material etc. Import of these items from China and India at lesser cost would help rectifying growing trade deficit.
Finally, to combat likely persisting stagflation situations, it is essential to develop human capital on war footing to make possible use of latest technology in all economic activities.