The structural theory of inflation says inflation is caused by a ‘structural’ weakness in a country’s capacity to produce goods or maintain an adequate flow of supply. General under-productivity creates imbalances between supply and demand. Inflation that stems from structural issues may not be easily changed by monetary policy.

“The inflation rate is falling faster than we expected, which is a positive sign for our economy,” says Finance Minister Muhammad Aurangzeb, adding, “Continued efforts are needed to maintain this trajectory.”

The annual consumer inflation is stated to have plunged to a 44-month low of 6.9 per cent in September “owing to a steady decline in global commodity prices, an increase in domestic agricultural production and a stable currency rate”, as per a Dawn article. The decline is also partly attributed to a high-base effect from last year when annual inflation stood at 31.4pc.

That inflation continues to rise despite consecutive interest rate hikes, argues Policy Research and Advisory Council Chairman Younus Dagha, has raised questions about the effectiveness of the State Bank’s traditional monetary tools. He called for a closer examination of the factors behind the recent drop in inflation.

Analysts urge closer inspection of monetary tools as food and energy prices continue to rise despite drop in core inflation

The perceptions of various stakeholders, however, differ on the issue. Topline Securities CEO Mohammed Sohail believes that aggressive monetary tightening is “a key factor in bringing inflation below 7pc one year ahead of target”. The high rate of inflation is also generally attributed to abnormal fiscal expansion. Prime Minister Shehbaz Sharif says the dropping of the inflation rate to 6.9pc was proof of the government’s efforts for a stable economy.

To quote a Dawn opinion piece, the recent decline in global energy and commodity prices has helped the government reduce domestic oil, transport and wheat rates. It, however, notes that prices of goods and services consumed by the people continue to rise even as the inflation rate falls below 7pc.

The weekly sensitive price index rose 13.18pc in the week ending Oct 3 owing to an increase in the prices of perishable vegetables. Core inflation, which excludes volatile food and energy prices, was recorded at 9.3pc in urban centres and 12.1pc in rural areas. The annual consumer price index (CPI), to quote experts, has historically been driven by the food and energy sectors.

To quote experts, the main causes of inflation can be grouped into three broad categories: demand-pull, cost-push, and inflation expectations.

The main reason Pakistan keeps getting into a balance-of-payments crisis is that the domestic productive capacity in industry and agriculture falls short of aggregate demand when it crosses the 4pc growth barrier and results in higher imports, says former SBP governor Dr Ishrat Hussain.

Domestic productive capacity in industry and agriculture falls short of aggregate demand when it crosses the 4pc growth barrier

To remove this constraint, he adds that the agriculture, industry, and export sectors must be expanded through investment and productivity gains to make them competitive. In this context, it may be worthwhile to mention the initiatives taken by Sindh and Punjab.

On Oct 9, Sindh’s Chief Minister Syed Murad Ali Shah directed the provincial agricultural department to analyse the market for crops, especially those that were imported by the federal government, and advise the local farmers to grow those crops instead.

Mr Shah has allocated Rs8 billion through the Benazir Hari Card for incentivising growers, particularly the small ones, at the start of the Rabi season to grow wheat as a bumper crop apart from other crops. Mr Shah also directed the agricultural department to prepare a scheme to provide agricultural machinery to growers in easy instalments.

As for Punjab, the provincial government has initiated a comprehensive, integrated and centralised approach to control soaring food inflation, ensure food security and protect consumer rights.

The intended reform brings various agencies performing functions such as food quality assurance, agriculture marketing, wheat procurement, storage and sales, consumer rights protection etc, under the Punjab Price Control and Commodities Management Department. The move envisages the abolition of the malfunctioning food department.

Vested with a vast mandate, the new department is expected to effectively regulate the supply and demand of politically sensitive commodities — wheat, flour and sugar — control food prices and supervise related industries, particularly the flour and sugar mills. The department will have the power to propose and formulate legislation and policies.

Analysts have welcomed the initiative but feel that concerns about the capacity of the bureaucratic set-up need to be addressed.

The provinces are also expected to introduce a uniform tax on agriculture income from July 1, 2025, which hopefully will raise substantial revenues for investment in agriculture.

Owing to the lack of attention and resources in the industry, cotton ginning factories have dropped from 1,200 to 400, and Pakistan, once a global leader in cotton production and exports, spends $3-4bn annually on cotton imports, says Commerce Minister Jam Kamal Khan.

A well-known economic theory called the Phillips curve implies that inflation tends to move in the same direction as the overall economy, rising during booms and declining during recessions.

However, according to an International Monetary Fund working paper prepared by a team of Fund researchers — Michal Andrie, Jan Bruha and Serhat Solmaz — “There is a positive co-movement of output and inflation at business cycle frequencies.”

Published in Dawn, The Business and Finance Weekly, October 14th, 2024