Monetary policies: Never a dull moment:

 Monetary policies:  Never a dull moment:

 

another 100 basis point increase in interest rates! One can only conclude that, in light of the difficulties that the general public and businesses are already experiencing, Pakistan's economic managers' persistent misinterpretation of inflation is actually becoming quite frustrating and disruptive.

Although it is understandable that our inflation is currently hovering around 30 percent, the central bankers are naturally tempted to use any monetary tool at their disposal to reduce it. However, one would have thought that policymakers would prudently identify the true causes of the current inflation before enforcing an already punitive interest-rate regime.

This is to carefully determine whether further increases in interest rates will aid in lowering inflation or simply compound it, which would be counterproductive.

The following chronology emerges from a comprehensive examination of the current inflation drivers.

A) The fact that goods and raw materials imported from outside (imports) were competitive in price and quality in key categories was one of the primary reasons for the surge in imports. For instance, it made economic sense to import essential raw materials and food ingredients like tomato paste, food colors, preservatives, processed corn slices, and so on because they were not only of higher quality but also less expensive.

In other words, despite the difficulties in the external account, a significant portion of the imports were keeping inflation under control and contributing significantly to the smooth operation of the national supply chain. In addition, it was simultaneously generating easy-to-collect revenue for the national coffers.

B) When the currency was devalued, everything changed overnight, and instead of controlling prices and ensuring supply chain security, this unhealthy reliance on imported goods became a driver of inflation.

C) Fortunately, the Covid-19 pandemic arrived unannounced, and a global phenomenon of rising commodity and oil prices also contributed to the problem.

D) Following that, the blunders of our governance manifested themselves in sudden, impulsive responses to control imports. These responses, by this point, had perhaps almost become compulsions as a result of a long-standing history of poor handling of factors directly affecting the external account equation, and as a result, the sole requirement for establishing competitive pricing nationally became singularly correlated with the production capabilities and efficiency of the domestic production apparatus. Unfortunately, as is well known, this had been neglected for decades (Pakistan has been de-industrializing rather than expanding its manufacturing base in recent years), and as a result, it was unable to produce the kind of output that could help keep prices under control.

E) As a result, the current inflation is largely attributable to a crippling industrial environment that prevents manufacturing from producing competitively and also limits economies of scale. In order to reduce inflation and remove this bottleneck, it is necessary to free domestic industry from its constraints and allow it to generate optimal market-based returns that are comparable to regional benchmarks.

When we take a quick look around, we notice that Pakistan's private sector faces unfair competition from its regional rivals in terms of interest rates: Even the corporate taxes, sales tax zero-rating facility, and utility inputs tell a similar story, with Pakistan at 16%, India at 6%, and Bangladesh at 5.7%. There is a risk that Pakistan will fall into a vicious stagflation trap in which growth declines, unemployment rises, but inflation persists if business in the country collapses under the weight of unfriendly economic policies!

Positively, despite the fact that the fundamental inflationary dynamics of the 1970s and even the early 2000s still share some characteristics, modern economies tend to be quite distinct. In the sense that professional collective bargaining is now a thing of the past, that globalization is spreading quickly, and that demographics are changing, all of these factors automatically create a buffer for any kind of long-term inflation.

Normal economies, in contrast to Pakistan, do not support major currency devaluations or unnaturally high interest rates. However, inflation is often seen as an aftereffect or implication of an economy returning to growth as a result of policy-induced measures.

Normal economies also do not experience shocks to their external accounts of the magnitude that force them to block imports, which causes prices to rise unchecked. According to an intriguing Indiana University study by economic historian Rebecca I. Spang, modern economies do not repeat themselves; actually cannot.

"The majority of the tools of connectivity simply did not exist at that time, so it may be irrelevant today to recognize the complexity of any particular moment in the past."

Consequently, governments today cannot afford to attribute economic downturns to any particular economic cycle, and as a result, they are forced to bear the full brunt of the consequences. Ironically, the theory does not hold up in Pakistan; Not only does history continue to repeat itself, but governments also continue to repeat almost identical economic errors.

In conclusion, we are living in unprecedented times, and it is abundantly clear that economic managers must do more if we are to fulfill our dream of a stable and long-lasting economy. Instead of just applying formulas from a textbook, a holistic approach and some fresh thinking are needed to find solutions that take into account the realities of the situation.