Stagflation is an ugly word. In fact, a forced marriage of sorts imposed on two independent-minded, if scary, words: stagnation and inflation. It implies rampant inflation accompanied by a loss in GDP growth. The word was first coined in 1970s to describe the economic situation of the United States. The economy was reeling from an oil embargo imposed by a coalition of Arab oil producing countries to protest hegemonic US policies.
Stagflation is now threatening the Pakistani economy, not on account of some natural disaster or hostile action by foreign powers but owing primarily to flawed economic policies of the incumbent government. Following several years of low inflation, eight months after the Pakistan Tehreek-i-Insaf took power, the inflation rate has touched 8 per cent according to official herald. The rate is determined by comparing the prices of of 481 goods and services of routine use. Unofficial estimates vary, with the worst pessimists claiming 30 to 40 per cent hike in prices. The salaried class and the unemployed people have been the worst hit as a result.
The government has also reported that tax collection over the period has been nearly half of that during the previous financial year. This corroborates with warnings of a recession – that is, reduced production levels and a decline in employment.
For nearly seven decades now, the IS-LM economic model, a mixture of the financial and monetary policy has occupied the central position in economic policy making in both developing and developed economies. The model suggests that when a tight monetary policy is pursued in an economy on account of meager reserves foreign investment has little impact on economic growth. An expansionary fiscal policy under the circumstances would bring about a “crowding out” and raise interest rates in the economy.
A review of the past decade indicates that the Pakistan Peoples Party-led government was in the good books of the masses, particularly the salaried class, although the official inflation rate in 2010 was 8 per cent. This can be explained in terms of a drastic salary raise (50 per cent). The policy caused a positive trickle down in almost every sector of the economy. It proved the optimal pro-people and pro-cyclical policy
However, the rising interest would cause a shrinking of the domestic investments as well the GDP. The redeeming feature of an interest hike could attract more domestic bank deposits which might strengthen the ceurrency against the US dollar. However, such an improvement might lack longevity.
A review of the past decade indicates that the Pakistan Peoples Party-led government was in the good books of the masses, particularly the salaried class, although the official inflation rate in 2010 was 8 per cent. This can be explained in terms of a drastic salary raise (50 per cent). The policy caused a positive trickle down in almost every sector of the economy. It proved the optimal pro-people and pro-cyclical policy.
Currently there is no effort to increase the bank-deposit ratio. The rupee has lost consierably against US dollar on account of rampant money laundering and a reluctance to invest in domestic markets. The reluctance is being blamed on the investors’ fear of being pursued by the National Accountabilty Bureau and the Federal Investigation Agency. Thus a large amount of money is such lying idle. Persuading people to invest it can boost GDP and exports and bring the inflation down.
The government would do well to provide some relief to the salaried class. This can be accomplished by raising the salaries by at least 50 per cent to offset the inflationary impact.
In the late 1960s during the Ayub era, the economy was keeping abreast with Singapore, Taiwan, Japan, South Korea and Malaysia. A sustainable change can only come from within a society or economy.
The writer is a PhD Scholar of Economics