Record inflation and the journey there

Little can be achieved from fixating on when the rot started to set in. What is needed is a focus on where we stand and what can now be done

April saw more of the punishing inflation characteristic the last couple of years, with a record 36. percent rise year-on-year. The month’s increase was 2.4 percent, and the year-on-year inflation last month was 36 percent, marking the 11th month since last June that inflation was above 20 percent. The economy is not heading into hyperinflation yet. Hyperinflation is defined as over 50 percent a month. That works out at several quadrillion times a year. That is then prices change on an hourly or daily basis, not weekly or monthly.

What has made this inflation so unbearable is that it is accompanied by low growth. An indication of this came in the monthly trade figures, which showed that the trade deficit in the first nine months of 2022-2023 had shrunk 39.62 percent from $39.3 billion to $26.7 billion. This does provide some relief to economic managers worried about where to make the next payment, but it has not been achieved because of some mighty surge in exports, which have indeed shrunk 11.2 percent from $26.2 billion to $23.3 billion. Imports declined 28.4 percent from $65.5 billion to $26.9 billion. The trade volume thus shrank from $91.7 billion to $50.2 billion. 

That decline in commercial activity implies a severe contraction, especially in an economy where export sales lead growth. Not only are households losing their sources of income, as breadwinners become jobless, but that bread goes out of reach. The inflation news was bad enough, but the hike was on the basis of high food inflation. Not only do households have to handle loss of income, but pay more to put food on the table.

One of the main difficulties is that the path out of this lies in a massive expansion of exports, which have shrunk. That is not going to happen. The import bill can only fall so far, with the decline in the global oil price likely to translate into benefits for Pakistan. However, a disturbing fact has been the failure of consecutive interest rate hikes to tame inflation. They have probably led to contraction, and thus stagflation. The experience of half a century ago shows that interest rate hikes to tame inflation may well have caused the stagflation characteristic of the era. Interest rate hikes are always bad for business, and are a really bad idea if they don’t work either to tame inflation. The IMF wants to suggest them. The government must not fall for this, as it reflects a lack of solutions.

What it must also do is reflect. There is much that is wrong with Pakistan’s economy, and little can be achieved in the short-term by going over where the rot started over the past 75 years. But it is worth looking at where these more than seven-decades as a nation state have brought us, if not why they have brought us to this point. 

Pakistan’s Human Development Index value for 2021 is 0.544— which puts the country in the Low human development category—positioning it at 161 out of 191 countries and territories. Between 1990 and 2021, Pakistan’s HDI value changed from 0.400 to 0.544, a change of 36.0 percent. The great irony of this, of course, is the fact that this index on which Pakistan finds itself slipping fast was in fact developed by a Pakistani — Dr Mahbub ul Haq, who created HDI in 1990. The index was then used to measure the development of countries by the United Nations Development Program (UNDP).

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Meanwhile, the Gender Development Index (GDI), which measures gender gaps in achievements in three basic dimensions of human development: health, education, and standard of living, shows a massive gap. The 2021 female HDI value for Pakistan is 0.471 in contrast with 0.582 for males, resulting in a GDI value of 0.810, placing it into Group 5, making it part of an unenviable group of countries that includes Ethiopia, South Sudan, and Afghanistan. Meanwhile on the Gender Inequality Index, Pakistan ranks 135 out of 170 countries.

In 2021, the World Justice Project’s Rule of Law Index ranked Pakistan 130 out of 139 countries. Pakistan ranked second-last in South Asian countries behind the likes of  Nepal, Sri Lanka, India, and Bangladesh. Only Afghanistan was ranked lower. In particular, the report showed Pakistan doing badly in the areas of corruption, fundamental rights, order and security and regulatory enforcement.

Just this year, Pakistan fell by 12 places on an index of media freedom. Pakistan was 145th on the 2021 index and fell to 157th on a list of 180 countries in 2022. The report noted that despite changes in political power, “a recurring theme is apparent: political parties in opposition support press freedom but are first to restrict it when in power”. The report also claimed that the “coverage of military and intelligence agency interference in politics has become off limits for journalists”. On the economic front, matters have not been much better. 

None of the indicators paint a pretty picture. Human development in Pakistan has taken beating after beating. Political turmoil has left the country without any stable government, making the government of Pakistan a dodgy business partner. Consistent security failures and the inability to protect our own citizens means that the possible potential of Pakistan as a tourist destination, something other South Asian countries like Malaysia, Thailand, Vietnam, and Indonesia have done successfully, has been squandered. 

And on top of all of this, Pakistan now faces the major crisis of climate change — which is perhaps the single most relevant and dangerous threat to our national well-being. According to the Center for Global Development, developed countries are responsible for 79% of historical carbon emissions. Yet studies have shown that residents in least developed countries have 10 times more chances of being affected by these climate disasters than those in wealthy countries. Further, critical views have it that it would take over a 100 years for lower income countries to attain the resiliency of developed countries. Unfortunately, the Global South is surrounded by a myriad of socio-economic and environmental factors limiting their fight against the climate crisis.

This year has seen Pakistan receive a bumper crop of wheat. While this is a cause for immediate happiness, we must also face the sobering reality that this year has seen an excess of rains and cooler temperatures that have come from climate change. While we are reaping the benefits for now, there is no telling where weather patterns will take us this monsoon season. Far from being prepared for such events, Pakistan is far from out of the crisis caused by the 2022 floods. 

The sheer immovable force of climate change was painfully displayed last year. There was a gargantuan increase in the amount of monsoon rainfall that Sindh and Balochistan have seen this year. The two provinces saw the highest amount of water fall from the skies in living memory, recording 522 and 469 per cent more than the normal downpour. All in all, according to the latest report of the Post-Disaster Needs Assessment (PDNA), Pakistan needs at least $16.3 billion for post-flood rehabilitation and reconstruction. The PDNA report, released by the representatives of the government and the international development institutions, calculated the cost of floods at $30.1 billion – $14.9 billion in damages and $15.2 billion in losses.

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