Purchasing power falls more than 50 per cent

[LahoreEstate]

Sunday, May 31, 2009
By Israr Khan

ISLAMABAD: The earnings of ordinary fixed-income Pakistanis, especially pensioners, have reduced in real terms to half due to falling purchasing power of the rupee and skyrocketing inflation during 2008-09.

This indicates that now, consumers can buy 50 per cent less with the same amount what they could a year back.

Yet the PPP-led government is ‘sleeping on the wheel’ and the consumers have been left to the mercy of multinational companies, unjust profiteers and big cartels having political backing. Every body knows about this ‘open secret’ of involvement of some politicians and government machinery’s high ups in criminal trade distorting the economy.

Depreciating rupee and record high inflation are the monsters that also contributed in raising Pakistan’s external debt burden, debt servicing and loan repayments.

This has badly confused the government’s economic policymakers and confronted them with the dilemma of balancing financial accounts. Roughly, one rupee against US dollar, contributes to debt burden by more than Rs47 billion.

During the fiscal year under review, Pakistani rupee depreciated by one third or 20 rupees against US dollar and other major currencies. This indicates that during the last one year, external debt burden mounted by about a trillion rupees due to reduced rupee value.

Average ten months (July-April 2008-09) inflation stood at 22.35 per cent against corresponding period of the last fiscal. For each one per cent increase in inflation, more and more people fall into poverty as the poor are highly sensitive to price changes in food, particularly staple food items, economists believe.

The government is claiming that in 2009-10, inflation would come down to single digit. Independent economists believe that the decline would not be due to government efforts but because of base effect. When the Federal Bureau of Statistics (FBS) would compare the prices with the 2008-09 high prices, it would show reduced inflation. This is just the game of numbers, and in real terms prices would be still high.

A person getting Rs10,000 per month a year back was meeting day-to-day food and necessities no has in real terms less than 5,000 rupees and due to double digit inflation and currency depreciation it is hard to meet food and necessities.

The sugar, cement, fertilizers and various other cartels are fleecing the common man and earning unjust profit of billion of rupees.

The Competition Commission of Pakistan (CCP) has proved to be toothless watchdog against violators.

The Bretton Woods Institutions for the last few years have been advising Pakistan to depreciate the rupee, to rein in the runaway trade deficit. Though during the period under review, the Pakistani rupee depreciated by 33 percent, yet that neither helped in slowing down imports growth, nor in increasing exports but pushed prices of essential commodities up.

Pakistan’s traditional exports are inelastic, therefore devaluation gives no big boost, because there is a small quantum of value added exports and major requirement is based on export of raw material.

Devaluation also makes imports costlier contributing to inflation. At the moment the government seems to be helpless to rein in the spiralling inflation and save rupee from free fall.

For the outgoing fiscal, the exports target was $21.1 billion while during July-April 2008-09, volume of the country’s exports stood at $14.76 billion which is 3.03 per cent less than what was recorded in corresponding period of the last fiscal ($15.22 billion).

Though devaluation helps increase revenue collection and savings in repatriation of profits and royalties by existing foreign investors, bringing illegal foreign exchange leakages into official channels and putting an end to gold smuggling.

Inflow of foreign capital can be improved by devaluation only, if prices do not rise. But in Pakistani case, it jacked up prices and further stimulated inflation.

In short run, the obvious consequences of devaluation is worsening balance of payment position due to which, Pakistan had to go again to International Monetary Fund (IMF) for $7.6 billion loan under the standby arrangement program. Besides, it also raised burden of Pakistan ‘s foreign debt and debt service liability and foreign loans repayment. Upset the cost-price relationships in economy, lead to galloping inflation, and stall many ongoing projects due to cost overrun.

http://www.thenews.com.pk/daily_detail.asp?id=180387