One of the most debated topics right now is the behaviour of inflation in the post-COVID economy. Consumers and producers alike are jeopardized by the current economic situation and the two major macros; inflation and unemployment.
In this article I will discuss a few logical statements which will make it easier for the reader to understand the natural course of inflation in the post-COVID economy. Inflation as we all understand is the rise in general price level of good and services, which means consumption starts to become more expensive with time.
What needs to be understood here is the cause of inflation. Under the current socio-economic conditions Pakistan’s economy is facing a perplexing situation both on health and economic fronts. The cause of inflation is Pakistan is not just policy driven, where businesses and individuals are facilitated by public policy borrowing and there is a rise in demand. The causes are rather an amalgam of depreciating exchange rates, governance issues and a deficit in forecasted budget.
Global inflation is inevitable due to major disruptions in supply chains. Almost every industry has been struck due by COVID however some such as agriculture and tourism have been struck the hardest. Farmers have been unable to cut and store their harvest. Major airlines such as Emirates and British Airways among others have ceased their flights. Finally, as the lock down has started to ease such as in the western countries there is a sudden rise in demand. With manufacturing sector being closed for an average of twelve weeks retailers are now finding it hard difficulty to find suppliers to keep inventory up and running.
However, the main cause of inflation in Pakistan currently is due to demand and supply factors. Food inflation is expected to be the highest form of inflation between 2020-2021. It is the result of farmers being unable to farm due to COVID and mass scale invasion by swarms of locust who have devoured more than half of the country’s ready standing crop.
The second issue in Pakistan that cannot be left untouched is that of governance. Despite governments best efforts to regulate fuel and food prices retailers have created artificial shortage. Filling stations have shut down on national level refusing to sell fuel claiming they do not have a supply. Grocery stores are selling consumer staples at five times the original cost. Consumers are left with no choice but to buy necessary consumption items at higher prices.
Covid and swarms of locust are additional problems to what the country is already facing. The fragility of country’s debt position is evident with public debt and liabilities risen by 40% in the last 15 months. Secondly there is a budget deficit which means the revenues collected by the government fall short of the expenses that the government needs to incur, leaving the treasury under immense pressure. According to forecasted budget for 2020-21 there is an expected shortfall of 9%. Falling exchange rate has added to the inflationary pressure since imports have become more expensive.
Inflation during the next fifteen months is unavoidable globally but it has become a bigger challenge for Pakistan as the country is already facing internal challenges. It is essential that along with government’s efforts to tackle treasury issues we as individuals make individual efforts to help the country get through these difficult times.