The structural theory of inflation says that inflation is caused by a “structural” weakness in a country’s ability to produce goods or maintain an adequate flow of supply. General underproductivity creates imbalances between supply and demand. Inflation arising from structural problems may not be easily modified by monetary policy.
“The rate of inflation is coming down faster than we expected, which is a positive sign for our economy,” Finance Minister Muhammad Aurangzeb said, adding, “Continued efforts are needed to maintain this trajectory.”
It said annual consumer inflation fell to a 44-month low of 6.9% in September “due to steady declines in global commodity prices, rising domestic agricultural output and a stable exchange rate”, according to a daybreak article. The decline is also partly attributed to a higher base effect than last year, when annual inflation was 31.4%.
This inflation continues to rise despite consecutive interest rate hikes, the Chairman of the Advisory and Policy Research Council, Younus Dagha, has raised questions about the effectiveness of the State Bank’s traditional monetary instruments. He called for a closer examination of the factors behind the recent decline in inflation.
Analysts call for closer inspection of monetary instruments as food and energy prices continue to rise despite lower core inflation
However, the perceptions of different stakeholders differ on this issue. Topline Securities CEO Mohammed Sohail sees aggressive monetary tightening as “a key factor in bringing inflation below 7% a year ahead of target”. The high rate of inflation is also generally attributed to abnormal fiscal expansion. Prime Minister Shehbaz Sharif says the fall in the inflation rate to 6.9% was proof of the government’s efforts for a stable economy.
To quote a daybreak op-ed The recent drop in global energy and commodity prices has helped the government cut domestic tariffs on oil, transport and wheat. However, it notes that the prices of goods and services consumed by people continue to rise even as the inflation rate falls below 7%.
The weekly price sensitive index rose by 13.18% in the week ended October 3 due to increase in perishable vegetable prices. Core inflation, which excludes volatile food and energy prices, was 9.3 percent in urban centers and 12.1 percent in rural areas. The annual Consumer Price Index (CPI), to quote experts, has historically been led by the food and energy sectors.
To quote experts, the main causes of inflation can be grouped into three broad categories: demand pull, cost push and inflationary expectations.
The main reason why Pakistan continues to enter a balance of payments crisis is that the domestic production capacity in industry and agriculture does not meet aggregate demand when it crosses the 4% growth barrier and results in higher imports, says former SBP Governor Dr. Ishrat Hussain.
Domestic productive capacity in industry and agriculture does not meet aggregate demand when it exceeds the 4% growth barrier
To remove this constraint, he adds that the agriculture, industry and export sectors must be expanded through investment and productivity gains to make them competitive. In this context, it may be worth mentioning the initiatives taken by Sindh and Punjab.
On October 9, Sindh Chief Minister Syed Murad Ali Shah ordered the provincial agriculture department to survey the market for crops, especially those imported by the federal government, and advise local farmers to grow those crops.
Mr. Shah allocated Rs 8 billion through Benazir Hari Card to incentivize growers, especially small ones, at the beginning of the Rabi season to grow wheat as an exceptional crop apart from other crops. Mr. Shah also directed the agriculture department to prepare a scheme to provide farm machinery to the cultivators in easy installments.
As far as Punjab is concerned, the provincial government has initiated a comprehensive, integrated and centralized approach to control rising food inflation, ensure food security and protect consumer rights.
The intended reform brings various agencies performing functions like food quality assurance, agriculture marketing, purchase, storage and sale of wheat, protection of consumer rights etc. under the Punjab Price Control and Commodity Management Department. The move calls for the abolition of the faulty food department.
Endowed with a broad mandate, the new department is expected to effectively regulate the supply and demand of politically sensitive commodities – wheat, flour and sugar – control food prices and supervise related industries, particularly flour mills and sugar. The Department will have the power to propose and formulate legislation and policies.
Analysts have welcomed the initiative, but believe that concerns about the capacity of the bureaucratic structure need to be addressed.
Provinces are also expected to introduce a flat tax on agricultural income from July 1, 2025, which will hopefully bring in substantial revenue for investment in agriculture.
Due to a lack of industry attention and resources, cotton gins have declined from 1,200 to 400, and Pakistan, once a global leader in cotton production and exports, spends $3-4 billion annually on cotton imports, says Commerce Minister Jam Kamal Khan. .
A well-known economic theory called the Phillips curve implies that inflation tends to move in the same direction as the overall economy, rising during booms and falling during recessions.
However, according to an International Monetary Fund working paper prepared by a team of Fund researchers – Michal Andrie, Jan Bruha and Serhat Solmaz – “There is a positive co-movement of output and inflation at business cycle frequencies”.
Published in Dawn, The Business and Finance Weekly, 14 October 2024
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