What the Deputy Governor State Bank of Pakistan said in a parliamentary committee meeting couple of days ago literally means that people of Pakistan should prepare to face high inflation and price hike for next two years. The inflation is likely to remain in double digit for nearly two years before coming down 7%. Deputy Governor SBP sends a clear message that high inflation is to stay so learn to live with it.
According to The State Bank of Pakistan (SBP) –the inflation would remain at higher level for two more years. This was disclosed by the Deputy Governor SBP in the meeting of a special parliamentary panel constituted to give suggestions to tackle the rising inflation. Inflation would come down to the central bank targeted rate of 5-7% after two years, said SBP Deputy Governor Jameel Ahmad during a meeting of the sub-committee of National Assembly Standing Committee on Finance.
The special parliamentary panel has been set up with the single objective of recommending measures to control inflation. There was general consensus among the committee members on the root cause of rising inflation in the country. They blamed the wrong financial and monetary of policies of both State Bank and federal government for the high inflation. Instead of curbing inflation, these policies were further fuelling price hike in the country. The committee members and financial experts questioned the official policy prescription that was fuelling inflation instead of curbing it.
The deputy governor also admitted that the current double-digit inflation was caused by monetary policies, fiscal policies and administrative decisions. But he did not answer questions about how the central bank could contain cost-push inflation with demand-curbing policy measures.
Members and experts also questioned the rationale behind 5% positive real interest rate which, according to them, was suffocating economic growth and increasing unemployment. Core inflation in August was 8.2% while the SBP’s interest rate was 13.25%, resulting in over 5% positive interest rate. The policy rate is far too high and a one-percentage-point increase in interest rate brings down investment by 0.7%.
The experts suggested that instead of devaluing the currency to enhance exports, the government should give fiscal incentives to the exporters. At least 7% increase in the Sensitive Price Index was caused by the government’s indirect taxes.
One expert said that “it is high time for the government to decide whether the economy leads taxation or taxation leads the economy”. IMF policies disciplined the economy but their cost was humungous. Inflation was going up due to the exchange rate shock and it would stay at the level for two more years said an imminent economist. He added that inflation could not be contained until the government reversed its decision to increase electricity and gas tariffs, cut sales tax on petroleum products and restore transport subsidies.
Owing to the high cost of doing business and low demand, the factories were reducing the number of work shifts, which would eventually affect supply chains, said the president of Lahore chamber of Commerce and industry Almas Hyder. Due to these factors, the business community expected a second round of inflation after October, he further warned said.
Commodity prices were shooting up due to fiscal policies and the central bank wanted to curb inflation by increasing interest rate, which was a wrong policy, said the LCCI president. The uncertainty was also hurting the economy. “Uncertainty hurts the economy more than corruption,” remarked Hyder.
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27 September, 2019