Ever wonder why your savings never seem to be catching up with the shooting prices of real estate? Why whenever you think you’re going to start setting some money aside to get a car, car prices move faster than your savings do, and you never end up with enough? Essentially, are you ever frustrated by just how quickly money is losing its value?
The total currency in circulation or Money Supply in Pakistan in June 2018 stood at around Rs 16 Trillion – this is all of the money held by the public at that point in time. Surprisingly, this amount has increased to Rs 23 Trillion in the three years since 2018 – an increase of Rs 7 trillion. To put that into perspective, it is an overall increase of nearly 44% in just three years at a rate of nearly 15% increase every year. This is no small happening – it is a massive change not just in the overall amount of money circulating in Pakistan, but an astronomical increase in the acceleration at which money is being circulated. In comparison to the 15% average increase in money supply in the past three years, the GDP has grown at an average of only 1.8% per year in the last three years.
What effect does this have on the people of Pakistan? To try and understand how money supply affects the entire population, let us scale down the numbers for the sake of the example. Assume, for a moment, that there are exactly 10 people in the entire economy, and each has Rs 1000 in their pockets. This would mean that the total currency available (the money supply) would be Rs 10,000. Now let us assume that the total products in the economy are 10 apples, and each apple is worth Rs 1000, meaning products in the economy are worth Rs 10,000 in total. All the money has to be spent to buy apples. Each person can buy one apple each worth Rs 1,000 as currency is evenly distributed.
Now suppose that one of these persons, who has access to subsidized bank financing, government subsidies, amnesty schemes, or is an affluent business person and is given Rs 5000 more in addition to his Rs 1000 through one of these sources. The first thing that happens is that the money supply grows to Rs 15000, but the number of apples remains the same. Now remember, the apples are the only product that money is being spent on in this economy. Since the money is valueless unless it is spent, the price of one apple will rise to Rs 1500. This will lead to the one person who has Rs 6000 to buy four apples, whereas nine people will now only be able to buy 67% of an apple each. The price of the apples has effectively increased by 50%, and the ability to buy apples has decreased for everyone else.
Two things have happened here. The first is that there has been an increase in currency supply, but that increase has not been evenly distributed since not everyone has access to bank financing, amnesty schemes, or subsidies. In the real world, this can be seen as the difference between the business class and the salaried class, since people who are in business generate more wealth than people who are on salary. Salaries remain the same or increase only nominally.
The second thing happening is that the growth of GDP is slower than the increase in the money supply. At the end of the day, this means that there is more money to buy fewer products and prices increase resulting in higher inflation. This again penalizes the salaried classes disproportionately. The result is an increase in inequality of income and higher inflation.
This is almost exactly what has happened in Pakistan, on a much larger and much more complex scale. There has been a 44% increase in the money supply over the past three years, and a lot of it has been because of amnesty schemes and bailout packages for a number of industries, which were given out first to stop the economy from crumbling in 2018-19 and then given again between 2020-21 to act as a buffer between industries and the impact of the coronavirus lockdowns in Pakistan. Largely, this money entering the economy has landed in the pockets of the affluent, whose wealth has increased, allowing them to easily weather the inflationary storm of the past three years. Meanwhile, the majority of the population has not gotten the dividends of the increase in money supply. Instead, they have only been punished by the rising inflation. The question becomes, where have these additional RS 7 trillion gone to?
The federal Government has spent more than what they have earned in the last three years by an accumulated deficit of Rs 10,000 billion. This is not sustainable. Next year’s target for the federal fiscal deficit is Rs 3400 billion. There is still uncertainty over how the government plans to handle the circular debt, which is nearing Rs 3000 billion, and losses/debts of state owned enterprises are also rising at a phenomenal rate. Adding inflationary trend of commodities in the global market with serious challenges to the revenue target set by government; inflation is the dagger threatening affordability by the majority of the population
At this point, the government is itself admitting that it is difficult to control inflation and has set a target of 8.2% for the fiscal year 2021-22. Government strategy to give handouts in the shape of TERF, construction package, amnesty schemes, youth loans which the commercial banks are handing out to their trustworthy clients is itself inflationary. Take, for example, the construction package and Naya Pakistan housing loans. This injection of money supply has boosted demand more whereas the supply of housing has not increased at a similar pace resulting in a 50 to 100% increase in prices of residential plots, flats, and houses. This is making it impossible for the salaried classes to buy a piece of land or afford a flat or a 3 to 5 marla house even with the soft loans.
The question remains, does the government plan on affording protections to protect the majority of the population from inflation, or are their policies simply throwing them under the bus?
Excellent article on facts finding of increase in inflation and decrease in buying power of salaried person.
A significant uptick in consumer demand post-lockdown world, and supply shocks during lockdown have contributed significantly to recent inflationary pressures. Rightly pointed out that money supply is a contributor. But central banks are supposed to support businesses in expansionary policies so that they in turn can continue to provide salaries. On the other hand, it’s the Gov’s job to apply minimum wage standards or furlough schemes to support the salaried person. I don’t agree fully that these Gov/CB schemes are bad, they have contributed to a flatlining economy. I do agree that the Gov has not done enough to support the salaried person.