Key Takeaways:
• Recent budget measures, including increased taxes, are likely to reverse the downward trend in inflation
• International oil prices and monetary policy decisions may further exacerbate inflationary pressures
• The IMF’s Extended Fund Facility program could lead to continued fiscal austerity, potentially hampering economic growth
Dr. Omer Javed, a renowned economist and author of the book “The economic impact of International Monetary Fund programmes: institutional quality, macroeconomic stabilization and economic growth,” has expressed grave concerns about Pakistan’s inflation outlook. In his recent analysis, Dr. Javed paints a troubling picture of the country’s economic future, highlighting several factors that could contribute to rising inflation and stagnant growth.
According to Dr. Javed, just as Pakistan was beginning to see a decline in inflation rates, the federal budget has introduced measures that threaten to reverse this positive trend. He notes, “The federal budget announcing a significant increase in direct taxes– although mostly on the already taxed, while a number of big ticket sectors in terms of contribution to the economy like retail, and real estate still have very little direct taxation– along with deeply enhancing the extent, and depth of taxation of consumption (or indirect taxes), the decreasing trend of inflation has already reversed direction.”
The economist points out that the lack of meaningful reforms in state-owned enterprises and the energy sector further complicates the inflation outlook. He argues that the current policy rate, which stands at 20.5%, has not kept pace with the consumer price index (CPI), potentially leading to stagflationary consequences for the economy.
Dr. Javed also highlights the impact of international factors on Pakistan’s inflation. He mentions that OPEC’s indication of continued oil supply constraints could lead to increased imported inflation. Moreover, he expresses concern about the US Federal Reserve’s cautious approach to cutting interest rates, which could pressure developing countries like Pakistan to maintain high policy rates to attract foreign portfolio investment.
The recent agreement with the International Monetary Fund (IMF) for an Extended Fund Facility (EFF) programme is another point of concern for Dr. Javed. He suggests that this agreement could lead to continued fiscal consolidation and austerity measures, which may not be the best approach for controlling inflation or promoting economic growth.
Dr. Javed criticizes the current federal budget’s pro-cyclical policy approach, particularly its emphasis on increasing revenue through indirect taxes. He argues that this strategy “will likely put greater inflationary pressures, but will also produce negative impact on economic growth, and likely increase poverty, and income inequality in the country.”
To illustrate the potential consequences of these policies, Dr. Javed cites a Bloomberg article that reported on the surge in milk prices following the introduction of a new tax. The article stated, “Milk prices in Pakistan surged by more than a fifth after a new tax was applied, making the dairy staple more expensive than in France, Australia and some other developed nations.”
In conclusion, Dr. Javed’s analysis paints a sobering picture of Pakistan’s economic future. He warns that without significant policy changes and a more balanced approach to economic management, the country may face continued inflation, stagnant growth, and increased poverty.
