The Inflation Challenge – Editorials

EDITORIAL: The 11% increase in the prices of POL products as of October 15 shocked a population already shocked by a 9% inflation in September with basic foodstuffs, especially wheat and sugar, witnessing price increases even at government-controlled electricity stores – outlets used by the government to expand subsidies to contain inflation.

The government’s claim is that the rise in the prices of oil and related products reflects the international price of oil which is currently around $ 84 per barrel. Critics, however, point to two major facts that dispute or dispute this claim. First, the international price of oil is much lower than the $ 140 per barrel available on the international market in 2008, when the domestic price was much lower than today.

It is true that the government has significantly reduced taxes on petroleum since fuel prices began to rise internationally (a source of revenue that governments have increasingly relied on as a source of revenue, the budget for fiscal year 2021-22 providing for 610 billion rupees under this heading) through sales tax remained unchanged, but compare the price of gasoline and its impact on the public with the price available in neighboring countries is inappropriate because purchasing power parity in dollars is significantly lower in Pakistan today than in our regional neighbors, including India, Bangladesh and Sri Lanka.

The spokesperson for the Ministry of Finance noted that in addition to the rise in the world price of fuel, the depreciation of the rupee also explains the rise in prices. This is certainly true as the rupee has depreciated from 152 rupees per dollar in May 2021 to over 172 rupees per dollar today.

Regardless of the assertions in the September 20, 2021 monetary policy statement that “since its IPO, the rupee has moved in an orderly fashion in both directions and has only depreciated by 4.8% to date, although less than many other emerging market currencies over the same period. ”The fact is that over the past four and a half months the rupee has depreciated by 13%.

Fawad Chaudhary, the Minister of Information and Broadcasting, tweeted that the government realizes that the wage class is suffering from inflation and has advised the private sector to increase the wages of its employees to help alleviate the effects of inflation.

This advice may gain the support of private sector employees, perhaps the minister’s goal, but unfortunately it does not reflect even a rudimentary knowledge of economic theory that warns against increasing wages as a means of fighting. against inflation given the phenomenon of inflation by pushing wages: an increase in wages would increase production costs which would lead to higher prices than before. It is precisely for this reason that the International Monetary Fund had advised the government not to increase the salaries of public sector employees in 2019-2020.

The current year’s budget increased the salaries of public sector employees, at taxpayer expense, but that, combined with higher subsidies, could well increase the budget deficit, unless other spending items do. are reduced, which is also a highly inflationary policy. Last but not least, the ever-growing number of government economics and finance experts need to share their views on the issue with finance ministry officials in order to come up with a solution that conforms to basic economic principles.

Copyright Business Recorder, 2021

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