OPINION
Ihsaan Afzal Khan
Inflationary tactics
same. Now remember, the apples are the only product that money is being spent on in this economy. Since the money is valueless unless it is spent, the price of one apple will rise to Rs 1500. This will lead to the one person If you’re going to increase the money who has Rs 6000 to buy four apples, whereas nine people will now only be able to buy 67% of an apple each. The price of the apples has effectively supply, at least divide it more equitably increased by 50%, and the ability to buy apples has decreased for everyone ver wonder why your savings never seem to be catching up else. Two things have happened here. The first is that there has been an with the shooting prices of real estate? Why whenever you increase in currency supply, but that increase has not been evenly distribthink you’re going to start setting some money aside to get a uted since not everyone has access to bank financing, amnesty schemes, car, car prices move faster than your savings do, and you never or subsidies. In the real world, this can be seen as the difference between end up with enough? Essentially, are you ever frustrated by the business class and the salaried class, since people who are in business just how quickly money is losing its value? generate more wealth than people who are on salary. Salaries remain the The total currency in circulation or Money Supply in Pakistan in same or increase only nominally. June 2018 stood at around Rs 16 Trillion - this is all of the money held by The second thing happening is that the growth of GDP is slower the public at that point in time. Surprisingly, this amount has increased than the increase in the money supply. At the end of the day, this means to Rs 23 Trillion in the three years since 2018 - an increase of Rs 7 trillion. that there is more money to buy fewer products and prices increase resultTo put that into perspective, it is an overall increase of nearly 44% in just ing in higher inflation. This again penalizes the salaried classes disprothree years at a rate of nearly 15% increase every year. This is no small portionately. The result is an increase in inequality of income and higher happening - it is a massive change not just in the overall amount of money inflation. circulating in Pakistan, but an astronomical increase in the acceleration This is almost exactly what has happened in Pakistan, on a much at which money is being circulated. In comparison to the 15% average larger and much more complex scale. There has been a 44% increase in the increase in money supply in the past three years, the GDP has grown at an money supply over the past three years, and a lot of it has been because of average of only 1.8% per year in the last three years. amnesty schemes and bailout packages for a number of industries, which What effect does this have on the people of Pakistan? To try and were given out first to stop the economy from crumbling in 2018-19 and understand how money supply affects the entire population, let us scale then given again between 2020-21 to act as a buffer between industries and down the numbers for the sake of the example. Assume, for a moment, the impact of the coronavirus lockdowns in Pakistan. Largely, this money that there are exactly 10 people in the entire economy, and each has Rs entering the economy has landed in the pockets of the affluent, whose 1000 in their pockets. This would mean that the total currency available wealth has increased, allowing them to easily weather the inflationary (the money supply) would be Rs 10,000. Now let us assume that the total storm of the past three years. Meanwhile, the majority of the population products in the economy are 10 apples, and each apple is worth Rs 1000, has not gotten the dividends of the increase in money supply. Instead, they meaning products in the economy are worth Rs 10,000 in total. All the have only been punished by the rising inflation. The question becomes, money has to be spent to buy apples. Each person can buy one apple each where have these additional RS 7 trillion gone to? worth Rs 1,000 as currency is evenly distributed. The federal Government has spent more than what they have earned Now suppose that one of these persons, who has access to subsiin the last three years by an accumulated deficit of Rs 10,000 billion. This dized bank financing, government subsidies, amnesty schemes, or is an is not sustainable. Next year’s target for the federal fiscal deficit is Rs 3400 affluent business person and is given Rs 5000 more in addition to his Rs billion. There is still uncertainty over how the government plans to handle 1000 through one of these sources. The first thing that happens is that the the circular debt, which is nearing Rs 3000 billion, and losses/debts of state money supply grows to Rs 15000, but the number of apples remains the owned enterprises are also rising at a phenomenal rate. Adding inflationary trend of commodities in the global market with serious challenges to the revenue target set by government; inflation is the dagger threatening affordability by the majority of the population Ihsaan Afzal Khan At this point, the government is itself admitting that it is difficult to control inflation and has set a target is a business of 8.2% for the fiscal year 2021-22. Government strategy to give handouts in the shape of TERF, construction executive with package, amnesty schemes, youth loans which the commercial banks are handing out to their trustworthy clients is itself inflationary. Take, for example, the construction package and Naya Pakistan housing loans. exposure in health, This injection of money supply has boosted demand more whereas the supply of housing has not increased at a education, power similar pace resulting in a 50 to 100% increase in prices of residential plots, flats, and houses. This is making it distribution and impossible for the salaried classes to buy a piece of land or afford a flat or a 3 to 5 marla house even with the soft loans. The question remains, does the government plan on affording protections to protect the majority of the manufacturing population from inflation, or are their policies simply throwing them under the bus?
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