The Government’s economic management team has taken a curious stand on the very damaging issue of inflation that the people of Pakistan have had to endure during the last two years.  The high inflation has pushed a large segment of the population close to the poverty line. Household finances have been devasted and personal savings obliterated with more and more people having to borrow to make ends meet.   The inflation has started to come down but at what cost?  Higher unemployment, diminished purchasing power and further de industrialization.  

It is important to examine the role of the Government’s economic team in causing inflation.  It started with a flawed budget making exercise which was based on over spending. 

The Government continues to practice fiscal mismanagement, run a huge budgetary deficit, print large sums of money and then borrows large sums resulting in the stoking of inflation, necessitating high interest rates (to control inflation that the Government itself causes by not balancing its budget) and then ends up spending most of its revenue on debt servicing, leaving next to nothing for development initiatives.

Whenever any Government spends more than it generates it has three options – Borrow money, Print money or Increase Taxes. All three options usually result in higher inflation particularly if the spending is on nonproductive terms.  The Government of Pakistan’s economic team has done all three.

To date, the Economic Team has failed to carry out serious structural reforms of the economy to make it sustainable, independent and capable of developing steadily, failed to improve ease of doing business in the country substantially, failed to increase exports meaningfully, failed to address the dependency of exports on certain imports,  failed to increase investments and savings to a level in line with comparable countries and failed to industrialize the country so it can provide employment opportunities to its youth. 

There have been some steps taken in this regard but they are too meagre compared to what is required.

What steps can the economic team take now to stop the downward slide?

Short term – balance the budget or substantially reduce the deficit by cutting expenditures, reduce borrowing and develop a plan for managing the debt and stop increasing the money supply.

Medium Term – decouple exports from imports as much as possible, bring down energy prices by reforming the power sector and start a program to  industrialize the country

Back to inflation – given the Government’s own role in causing inflation, can it expect accolades and appreciation from the populace as inflation is finally coming down after the people have paid a huge price?