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Sunday, November 26, 2023

How to curb Pakistan’s inflation genie

Air Cdre (Retd) Jamal Hussain thinks that to reduce and negate the negative impact of inflation, it is necessary to enhance the purchasing power parity of Pakistan's currency by increasing the national per capita income.

The idiom ‘Nothing can be said to be certain, except death and taxes’ is credited to Benjamin Franklin and is widely accepted as true worldwide. But in Pakistan, the term taxes may be excluded and instead substituted by inflation (mehangai in Urdu).

Since independence, inflation at various degrees has been a constant in the national economy. The price of international commodities like gold, silver, gas, petroleum products, etc.) does fluctuate up and down depending on the international market.

Read more: Pakistan’s Unusual and Unprecedented Food Inflation – What is driving it?

The rise in consumer price index (CPI) that is represented by a theoretical basket of goods, including consumer goods, services, medical care, and transportation costs, however, is inevitably upward – once the prices rise, they seldom come down.

The inflation genie when out of the bottle cannot be put back in – the key, therefore, is to control the rate of release. Economists believe a modest inflation figure indicates a healthy economy and deflation, where the CPI is in the negative, could prove harmful.

Given these economic fundamentals, one should not expect the government to bring the CPI down but rather its rise should be kept at a manageable level.

Read more: Pakistan’s economic recovery remains fragile, World Bank

Reducing negative impact of inflation

Prices of goods and services by themselves are not accurate indicators of the strength of the economy. For example, the cost of one liter of fuel in Pakistan today is about Pak rupee 108 while in the UK it is about British Pound 1.33, (roughly Pak Rs. 300).

Based on the purchasing power parity formula, the British citizens’ per capita income is about eight times higher than that of the Pakistanis, which means for the British citizens the cost of fuel is actually about one-third of what it is for the people of Pakistan.

Read more: Pakistan’s credit profile reflects economic strength: Moody’s

In the hybrid free economy that exists in Pakistan, the state should control prices of only those items in which it has the sole monopoly (gas, fuel, electricity, railways, and some others in Pakistan) and in the rest, the price determination should rest with the market forces of supply and demand.

The state, however, must ensure currency stability and take concrete steps to prevent hoarding, smuggling, and cartelization by private entities. Inflation would then, hopefully, remain under control.

To reduce and negate the negative impact of inflation, the key would be to enhance the purchasing power parity of its currency by increasing the national per capita income. Our economists have listed the steps and measures needed to achieve higher per capita income, and these must be implemented in letter and spirit.

Read more: Pakistan Economy’s Progress Card

Air Cdre (Retd) Jamal Hussain has served in Pakistan Air Force from 1966 to 1997. He was awarded Sitara-e-Basalat for his services in the year 1982. He regularly contributes articles on defense issues in the Defence Journal from Pakistan, Probe Magazine (Dhaka – Bangladesh) and national newspapers including Dawn, The News, and The Nation. He is the author of two books on ‘Air Power in South Asia’ and ‘Dynamics of Nuclear Weapons in South Asia’. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.