The macro economic and the fiscal instability along with the CBR’s inability to check and control concealment of colossal profits and evasion of taxes and duties have taken inflation to an unmanageable point. The economist’s ineffective measures to control inflation, which is fast growing into hyperinflation, is tarnishing the image of the government. The general public is losing its confidence in the government’s long term economic development programmes. The World Bank, Asian Development Bank and the IMF have also termed inflation as a serious and challenging problem, which could not only hamper growth but dilute efforts to alleviate poverty. The State Bank of Pakistan has also, in its 3rd quarterly report, warned that the high inflationary pressure could have serious repercussions on the long term growth. Even the parliamentarians are debating the issue in the house. The intentions of the opposition benches to initiate heated debate in the house on inflation appears only for the sake of criticism as they have not come forward with any support or suggestions to assist the government in controlling inflation, which has already failed to control it. The economic managers apparently have no control or solution to check the menace of the inflationary impact on the economy and are looking at it as mere helpless spectators. The economists and even the finance minister in the pre-budget T.V. talk-shows were witnessed only accepting the existence of hyper inflation and giving the nation good news about its continuation for some more time.
Even the prime minister, who is seen making day and night efforts for the development of the country appears to be helpless and without any concrete solutions and measures to get the economy out of the grip of the monstrous inflation.
The unprecedented inflation is ruthlessly hurting the population below the poverty line and fixed income recipients the most. They are now feeling the decline of real income along with the crunch of inflation. The others being hit are those with small savings. As the prices rise, the real value or the purchasing power of fixed income or accumulated savings is also deteriorating. How these adversely affected people are meeting their both ends meet is no concern of the economic managers. They are efficiently busy in reconciliation and straightening of data on inflation. The impact of inflationary pressure on the economic growth is measurable, as our economic managers do have theoretical economic models, and may be they are able to control it by artificial measures the way they are handling the stock markets. But who will take the responsibility of measuring and compensating the social cost to the nation on account of deteriorating social values where half of its population has to engage in all sorts of unethical, unscrupulous and immoral activities to keep themselves alive.
Half the solution to a problem lies in its correct identification and understanding. The type of inflation which is persistently on the rise in Pakistan has very strange features and as such cannot be classified under any economic description. If adequate measures are not taken to control it the snowball effect is going to be unmanageable, creating devastating results for the economy. Unfortunately our theoretical economic managers do not appear to have even the slightest perception of the causes of existing artificial hyperinflation in the country.
The government is attempting to restructure the Consumers Price Index (CPI) basket w.e.f. July, 2005. The CPI increased by about 11.10 percent in April, 2005.
The basket was last restructured in 2000-01 from the base year 1990-91. The existing CPI figures are as under:
Existing CPI Basket
|
Sr. No. |
Description |
CPI (%) |
|
1. |
Food and beverages |
43.34 |
|
2. |
House rent |
23.43 |
|
3. |
Transport and communication |
07.32 |
|
4. |
Fuel and lighting |
07.29 |
|
5. |
Apparel, textile and footwear |
06.10 |
|
6. |
Cleaning, laundry and personal appearance |
05.88 |
|
7. |
Household furniture and equipment |
03.29 |
|
8. |
Education and Equipment |
02.07 |
Restructuring of the CPI basket may improve the inflation numbers, however, what actual and consequential decline in the inflation and soaring prices is achieved will be a big question which only time can tell.
Apparently lots of efforts are going into the measurement of these indices but no meaningful efforts are being employed to control the prices which these indices can help to do. Some of the basic questions in this regard which need to be answered are (i) is the inflation due to inadequate monetary and fiscal policies? (ii) is it due to increase in the cost of inputs, raw materials and utility charges etc. or (iii) is it due to over profiteering? If it is over profiteering, is a normal rate of profit defined or prescribed by any authority or left to the equation of demand and supply, (iv) which government departments are responsible for controlling and checking prices? and lastly (v) what measures if any, these departments are taking to control the arbitrary price hike?
Although it will not be appropriate to come up with a new description or category of inflation as only economists may be authorised to do so but the type of inflation prevailing in the country could be termed as “mixed inflation”. Part of it falls under the established categories of inflation like demand-pull inflation or cost-push inflation etc. and the second can be classified as “artificial hyperinflation” created by some of the business enterprises due to enormously high profits and with income going unaccounted for and untaxed. This article focuses on the artificial hyperinflation resulting from colossal untaxed income.
A careful perusal of the Government Rules of Business reveals that the Economic Coordination Committee of the Cabinet (ECC), National Tariff Commission (NTC) and Monopoly Control Authority (MCA) directly or indirectly control prices and over profiteering.
The ECC, which meets every week, is primarily concerned with demand and supply and the prices of essential items like wheat, sugar and other relevant products. The Section 12(ii) of the NTC Act 1990 explicitly states that while examining a proposal for tariff protection or assistance and making recommendation to the Federal government the NTC has to satisfy itself that the cost of tariff protection to the consumer will not be excessive. The public is unaware whether the NTC, since inception, has initiated any case, on its own motion, against higher protection where cost to the consumer is evidently excessive.
On the other hand undue profit resulting from cartels or monopolistic situations is checked and controlled in terms of section 10(e) of the Monopolies & Restrictive Trade Practices (Control & Prevention) Ordinance, 1970. Under this Section the Monopoly Control Authority has to make recommendations to the federal government or a provincial government for suitable actions to prevent or eliminate undue concentration of economic power, unethical monopolistic power or unreasonable restrictive trade practices resulting in over profiteering. All this is apparently going by default.
Over the last couple of years the government has considerably reduced the customs duty on imported raw materials and most of the raw materials now attract duty rates as low as 5% to 10%. Besides, most of the raw materials are being imported from China at highly competitive prices and mostly at under-invoiced prices. Yet no reduction in the domestic prices has been witnessed nor has the benefit of the reduction in the import duties been passed on to the consumers, on the contrary the prices are increasing day by day. Moreover, the government seems to have no account, control and check on these issues.
It is argued that in the mixed or free economies it is the market mechanism that determines the price level on the basis of demand and supply. But in these countries the economic system is well documented, consumers are educated and understand their rights. Moreover, strong consumers’ associations are there to protect their rights both with respect to quality and the price of goods.
In Pakistan at present there is no control over the exorbitantly high prices being charged by the traders and manufacturers causing genuine hue and cry by the poor section of the population. Some of the essential commodities the prices of which need to be controlled are vegetables, fruits, food grains and pulses, flour, edible oil and ghee, tea, soft drinks, squashes, pharmaceuticals, milk and dairy products, toiletries (soaps, detergents, shampoos), sugar and garments etc. The finished goods and products the prices of which need to be scrutinized and controlled, inter alia, include consumer durables (air conditioners, deep freezers, washing machines and fridges etc), motorcycles and automobiles etc. On the other hand some of the raw materials include items such as ferrous and nonferrous metals, PET resin, formic acid, soda ash, caustic soda, PVC, stearic acid, sorbitol which are overpriced due to higher tariff protection and other reasons. Detailed scrutiny of these sectors, inter alia, should be carried out by the National Accountability Bureau with the assistance of technical experts. Netting and taxing the concealed income would yield substantial revenues, control the prices and consequently reduce the artificial hyperinflation.
Over profiteering on some of these items is quite obvious, e.g. motorcycles are being exported to Bangladesh with a reasonable profit at half the price at which it is being sold in the domestic market. Likewise over profiteering is evident on poplin fabric as it has been subjected to antidumping duties when supplied to the importing country.
The best way to check and control the prices of these and other products is to get the cost of production verified and if required should be appropriated or corrected (the appropriate method could be to take the value of raw materials / inputs and fabrication cost plus general and other expenses and add a normal rate of profit to it). This information is now available on internet around the world.
With (i) half the population living below the poverty line, (ii) high rate of unemployment and (iii) considerable reduction of upfront cost of raw materials the inflation in Pakistan can by no means be attributed to demand pull and cost push factors. The economic managers of the country need to come out of the theoretical economic puzzle and develop a practical approach and educate themselves on the issue of artificial hyperinflation, which has been created by huge unaccounted for business profits going untaxed and get the nation out of the clutches of the artificial hyper inflation which is the killer of all values.
The author is an analyst on trade and fiscal issues
