Worsening cost of living crisis – Journal


Long ignored, many imbalances in many market economies, emerging or developed, aggravated by global geopolitics and the war in Ukraine, have turned into serious crises. But a current, uncontrolled and persistent high rate of inflation has politically triggered the most sensitive “cost of living crisis” in the world.

In Pakistan, inflation has become a crucial political issue because of its possible impact on the upcoming provincial and national elections preceded by local polls. And yet, there is no clear indication of how the cost of living crisis will be resolved.

Headline inflation is expected to rise temporarily, may remain high through the next fiscal year, and is projected to fall to the target level of 5-7% by the end of 2023-24, according to the Bank’s Monetary Policy Statement (MPS). of State published on May 23. Headline inflation rose from 12.7% year-on-year in March to 13.4% in April.

In 2022-23, economic growth is estimated at half the 7-8% rate that economists usually maintain is needed to put the idle labor force to work and reduce poverty. The central bank expects the economy to grow 3.5-4.5% in FY23 on the back of tight monetary policy and planned fiscal consolidation, compared to an estimated 6% this year. exercise. The World Bank is of the view that Pakistan’s economy cannot grow by more than 4% on a sustainable basis.

During the pandemic, there was a new billionaire every 30 hours while a million people worldwide fell into extreme poverty every 33 hours, according to Oxfam

Business leaders criticized the central bank’s key interest rate hike of 1.5 basis points to 13.75 pc, arguing that it would discourage investment and industrialization by raising the cost of doing business.

According to the National Accounts Committee (NAC), the initial estimate of the investment-to-GDP ratio was 15% of GDP, the highest during PTI’s tenure but, according to an analyst, the ratio was below the level left by the PML. -N government in 2018. Private sector investment remained at last year’s level of 10% of GDP while fixed investment improved slightly to 13.4% of GDP.

However, in just over 10 months (July 1, 2021 and May 6, 2022), banks had extended net new loans to the private sector of around Rs 1,296 billion from Rs 421 billion, indicating growth in the economy. Apart from raising the policy rate on May 23, the central bank also raised concessional working capital rates for exporters and loans for the purchase of machinery to 7% and 7.5% to ease distortions. This should dampen domestic demand as well as inflation.

Despite lower savings and investment than targeted by policymakers, the CNA forecast economic growth of 6% for this fiscal year. Growth should be driven by consumption, with domestic demand largely satisfied by imports financed by external debt. The PML-N government has announced temporary restrictions on imports of non-essential items – measures not seen enough by many.

The savings-to-GDP ratio fell sharply to 11.1% in the current fiscal year from 14% the previous year. The ratio would have deteriorated due to the current account deficit.

Initial steps have also been taken by the government to encourage export-oriented investment. During his visit to Karachi on May 20, Prime Minister Shehbaz Sharif announced the immediate removal of the 17% general sales tax on solar panels imposed by the PTI government, arguing that this is the only way forward to reduce the country’s oil imports. He also highlighted the need for a mandatory solar geyser policy for every household.

Finance Minister Miftah Ismail recently offered tax incentives to multinationals if they presented him with an export plan. Until now, foreign companies have invested in import substitution industries because they have long argued that they need incentives for their products to be competitive in the export market. Foreign direct investment fell 1.6% to $1.45 billion in the 10 months of the current fiscal year. The inflow in April was 170.6 million, almost unchanged from a year ago.

Prime Minister Sharif also expects a $1 billion investment from Saudi Arabia for the installation of a desalination plant in Karachi to address the growing water shortage in the city. He is confident that the plant will take off soon as the investment guarantee is to be used by 2022. Saudi Arabia wants it to be the largest desalination plant in the region.

But the challenges are enormous. Pakistan is among 12 countries deemed more exposed than others to the ongoing war in Ukraine, according to the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP).

In its latest policy brief on “The War in Ukraine – Impacts, Exposure and Policy Issues in Asia and the Pacific”, ESCAP reports that these 12 countries could be the hardest hit as they were exposed to energy prices and food, lower external financial inflows, rising financial costs and a sudden shift in business sentiment. (Pakistan may have to spend $1.5 billion on wheat imports to compensate for supply disruptions caused by the war in Ukraine. Wheat production is estimated at 26.9 million tonnes this season, or less than the target of 28.9 tons.)

UNESCAP says soaring global energy and food prices are pushing up consumer inflation, which will disproportionately hurt poor households. At the same time, rising interest rates and rising inflation are undermining household balance sheets, investor confidence and the government’s ability to service debt.

People have become familiar with the idea of ​​a cost-of-living crisis, but that doesn’t begin to grasp the seriousness of what may befall us, an analyst recently wrote in The Economist. The war in Ukraine is putting a strain on a global food system weakened by Covid-19, climate change and the energy shock.

Grain and oilseed exports from Ukraine have mostly ceased, those from Russia have been hampered and India has suspended wheat exports. A BBC report says the high cost of staple foods has already increased the number of people who cannot be sure they have enough to eat by 440 million, to 1.6 billion. Nearly 250m are on the brink of starvation.

The charity Oxfam, which publishes an annual report on inequality at the Davos forum, claims that over the past two years a new billionaire has been created every 30 hours. At the other end of the income spectrum, Oxfam expects around 1 million people to fall into extreme poverty every 33 hours this year, according to the BBC TV channel quoting the international executive director of the charity, Gabriela Butcher.

Posted in Dawn, The Business and Finance Weekly, May 30, 2022

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