Poor need protection

Inflation is a global phenomenon. Pakistan just could not have escaped it, however we might wish to. The inflation data for the last fiscal also underlines this fact. The headline inflation rose to 12 per cent against the target of 6.5 per cent and from 7.77 per cent in the previous year, and was driven mainly by rising global oil and food prices. The June inflation escalated to 22 per cent, highest in a month. Food prices were up 32 per cent from 28 per cent in May — again highest in the country and the region but well below global food price index that has jumped to 54 per cent. Global petroleum markets continue to escalate — with crude futures nearing $150 per barrel — and food prices are projected to remain strong in the near term. Simply put, there is little hope of inflationary pressures on the economy easing over short term. Economists expect inflation to exceed the target of 12 per cent for the current year as the government phases out oil and other subsidies to seek support from multilateral donors to shore up its foreign exchange reserves that have dropped to above $11bn from over $16bn in October.

Seen against this backdrop, what should the government’s response to inflation, which refuses to subside despite the tight monetary stance being pursued by the central bank since 2005, be? That said, one cannot help talk about millions of poor, particularly the urban poor, whose life has been hit hard by the increasing food costs. Even a slight surge in food prices erodes their purchasing capacity and forces them to cut back on other essentials.

The government needs to protect the poor to lower income groups from the impact of the surging food prices. It cannot control the global inflationary pressures or tide domestic prices, but it can hedge the poor households by giving targeted subsidies. Price controls and indirect subsidies in the past have helped poor consumers only partially. The government needs to strengthen the social safety net targeting the poor and the vulnerable to help them through tough times. We have been hearing of such programmes but they have not made much of an impact so far. Projects such as direct subsidies for poor households in the form of cash transfers and provision of basic food items — wheat flour, pulses and ghee — at lower rates need to be more focused and made effective. True the government has already announced a cash transfer programme but when it will actually become operational and thus prove to be the starting point is not very clear. It would have to be done now, without any further loss of time. Unless the government moves rapidly, we may find millions pushed below the so-called poverty line.

Posted on: 14-July-2008

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