Expert opinion about the future outlook for inflation is sharply divided, as are the views about the tight monetary policy in controlling persisting, longer than the anticipated surge in prices for lack of required level of complimentary financial discipline.

In a comprehensive study of various global economic trends incorporating a wide range of experts’ views on persistent price increases, The Economist (London) observes: “even a global recession may not bring down inflation. The global economy is slowing down, and the outlook has darkened in recent weeks, perhaps into a recession, as central banks ramp up interest rates to battle a once-in-a-generation surge in prices. There is scant evidence that inflation is defeated anywhere. In much of the world it is broadening out.”

Pakistan is no exception. According to the State Bank’s Monetary Policy Statement (MPS) of November 25, food prices and core inflation are now expected to push the average FY23 inflation up to 21-23 per cent. The MPS has revised the average inflation from the earlier estimate of 18-20pc.

The monetary policy needs to be updated. According to modern monetary theory (MMT), if the central banks’ created money is spent on providing jobs to an unemployed labourer and not to idle consumers, then the increase in money will automatically be offset by the increase in production, says analyst Asad Zaman. More money combined with more output will not lead to inflation. He points out that the MMT’s recommended job guarantee programmes have been successfully tried in several countries, including China, India, Sweden and Australia.

There is scant evidence that inflation is defeated by hiking interest rates

Eminent development economist Michael Spence has identified a wide range of long-term price pressures that, he says, cannot be eased through traditional channels. He believes that a broad-based surge in productivity would dampen the combined effects of inflationary pressures.

Going by the previous Monetary Policy Statements, many analysts question prioritising inflation over all other things and ask how this interest hike would help check inflation. They say it could be an International Monetary Fund-inspired decision.

However, there is a view that the present trend towards reduction of the current account deficit recorded so far may be sustained at least during this financial year. The deficit dropped to $2.281 billion during July-October 2022 against $5.305bn in the same period last year. A current account deficit of around 3pc of GDP shared in the last monetary policy has been reaffirmed in the latest MPS.

“Chances are that the SBP move will ward off further deterioration in the balance of payments position,” says an opinion piece. There may be “signs that the tide might be turning away from (global) confrontation towards renewed (international) cooperation. That will help countries import goods from the cheapest sources if Western trade sanctions are gradually withdrawn. Pakistan has just sent a two-member delegation to Moscow for talks on oil and gas imports from Russia.”

Islamabad is also trying to reduce imports by boosting domestic production. The government has awarded exploration licences to energy firms committed to making a minimum investment of $65 million in the first three years of exploration activities to tap oil and gas reserves.

While the SBP has advised the government to maintain financial discipline, a policy rate hike will further deprive the government of fiscal space, says Landmark Investment CEO Faisal Mamsa. The interest rate hike will reportedly raise the cost of government borrowings as it will have to reprice the Rs5 trillion maturity of treasury bills and Pakistan Investment Bonds in the next three months.

According to the Ministry of Finance, in the first quarter of this fiscal year, the fiscal deficit was 1pc against 0.7pc GDP in the same period of last year. The government estimates its overall expenditure to surge past its budget target by about Rs1tr owing to about Rs900bn higher interest payments and less than Rs100bn revenue shortfall.

Owing to financial constraints, the federal development spending was cut to Rs98.78bn in the first four months of this fiscal year because of a more than 45pc increase in losses by state-run corporations. The development expenditure, thus stands at just 12.37pc of the total original public sector development programme budget allocation of Rs800bn, also down from the comparative Rs178bn figure last year.

Published in Dawn, The Business and Finance Weekly, December 5th, 2022