In a recent Dawn article, the authors — a former governor of the State Bank of Pakistan (SBP), chairman of Habib Bank Limited and president of Bank of Punjab — have discussed in detail a serious problem of Pakistan’s economy: unsustainably high level of currency in circulation (CIC).

Apart from unleashing other miseries in the economy and society, consistent buildup in CIC keeps fueling inflationary pressures and continues to frustrate the primary objective of interest rate tightening, which is reining in inflation.

The most immediate reason behind the recent rise in inflation has undoubtedly been the energy price hikes. However, an unacceptably high share of CIC in our total money supply (39 per cent as of June 2023) remains a consistent underlying factor.

Headline inflation shot up from 27.4pc in August to 31.4pc in September. This 400 basis points rise in inflation isn’t a good sign at a time when the country has already experienced enough demand compression amidst a tighter monetary policy and the ongoing International Monetary Fund-recommended reforms that are essentially demand-suppressing. This betrays the underlying currents of a looming stagflation.

As import restrictions ease and multinational companies clamour for freer repatriation of profits and dividends abroad, the rupee’s rise could be short-lived

After last year’s negligible GDP growth of 0.3pc, this year’s growth, too, is expected to be too low to lift even a fraction of 95 million Pakistanis out of poverty or reduce the current rate of joblessness that is estimated to rise to 10pc. The World Bank has recently predicted just 1.7pc growth for the fiscal year FY24 ending in June 2024 against the government’s initial target of 3.5pc.

Inflation numbers may be just lifeless stats for Pakistan’s governing elite. But behind these numbers remain buried hundreds of thousands of untold stories of miseries of the vast majority of 240m Pakistanis.

A 31.4pc annual inflation in September 2023 means that anyone whose income in September 2022 was Rs100,000 per month needs Rs131,400 to maintain his old living standard. Those who earned Rs50,000 are now in need of Rs65,700.

Currently, new jobs are unavailable. And industries and businesses continue to scale back their operations, rendering part of their workforce jobless — at least temporarily. Some of the competitive firms that are doing well despite all odds do compensate their employees against inflation, but the compensation ranges between 10-15pc in most cases. A 30pc plus inflation is just too problematic for all: workers, firms and small businesses.

But neither the menace of currency in circulation can be contained within one or two years. Nor other structural domestic reasons behind high inflation (like weak administrative controls, weaker coordination between provinces and the centre, absence of fair play of market forces, low output of crops and low productivity of farm and factory workers) can be addressed in the short run.

The only immediate option left with the government is to ensure some fiscal discipline. And the only thing the central bank can do is to tighten its monetary policy further. Whether the SBP will go for further tightening depends on whether it believes the inflationary pressure will remain high even in the coming months or whether it is convinced that at 31.4pc, inflation has already peaked and will gradually start coming down.

The rupee has reclaimed 7.6pc of its lost value against the US dollar within a month (between September 6 and October 5) thanks to a military-backed crackdown on hard greenback hoarders and unscrupulous exchange companies.

And effective October 1, the caretaker government has slightly lowered domestic fuel prices. These two things may help ease inflationary pressure in October. And if the crackdown continues and some expected easing in international oil prices creates room for holding local fuel prices at where they are for a few fortnights, then headline inflation should start easing.

But even then, keeping food inflation under control would continue challenging the government. The dynamics of food inflation are different. The main reason food inflation remains stubbornly high is that the system of ensuring administrative controls on prices of price-inelastic food essentials has almost collapsed.

Though down appreciably from August 2023 levels of 38.8pc and 40.6pc, food inflation in urban and rural Pakistan still stood at 33.9pc and 35.4pc respectively.

One key factor contributing to the buildup in inflation is overshooting of fiscal targets. If the gain in the rupee’s value can be sustained, it will lower the cost of domestic and external debt repayments in rupee terms. That should help the caretakers, as well as the next elected government, reallocate resources towards productive sectors and thus address cost-push elements of inflation. Besides, it would also lower the incidence of imported inflation.

But as import restrictions are being eased gradually and as pressure is building up from multinational companies in Pakistan to allow them freer repatriation of profits and dividends abroad, the rupee’s rising spree could prove short-lived. We must not become too optimistic about the possible outcome of the ongoing actions against currency hoarders and manipulators to forget that the country’s forex shortage is a structural problem.

In July-September 2023, the country’s goods’ exports fetched just $6.9 billion, whereas imports (despite experiencing a marked slowdown compared to July-September 2022) consumed $12.2bn. This left a trade deficit of $5.29bn.

Data on home remittances for July-September are still awaited. But in July-August 2023, Pakistanis working abroad sent back home around $4.12bn — 21.6pc less than the amount they had remitted in July-August 2022.

Unless exports rise fast (and imports remain static) and unless remittances restart growing rapidly, financing import bills even with the combined earnings of goods’ exports and remittances would not be possible. And that would widen the currently anticipated external financing gap and ultimately weaken the rupee and refuel inflation.

Published in Dawn, The Business and Finance Weekly, October 9th, 2023