Shakeel Ahmad There is widespread agreement that high and volatile inflation can be damaging both to individual businesses and consumers, and the economy as a whole. Pakistans economy faces considerable challenges due to militancy and rising inflation. The floods in 2010 had hit agricultural output and damaged transport and communication. Some parts of the country have been hit by the floods once again damaging whatever infrastructure had survived the previous wrath of nature. This is likely to accelerate inflation. The fiscal developments are worrisome: The revenue collection target for the previous financial year was not achieved; the figures are said to have been fudged. No heads have rolled so far, despite the huge embarrassment caused to the country in the eyes of donors and the world community. The revenue targets for the current fiscal year were unrealistically prepared to begin with. Due to the law and order situation in Karachi and now the floods in Sindh, these targets are under downward revision. There has been a steep rise in the cost of electricity to the consumers. This will affect businesses that will pass on the cost to the customers; trade and commerce will be similarly affected. There are no indications that there is any seriousness on the governments part to recover outstanding electricity bills, or take punitive measures in areas where electricity is being stolen all in collusion with WAPDA and KESC staff. There are no indications that agricultural incomes and real estate transfers will be brought in the taxation net. There are mysterious delays in carrying out revenue-increasing measures. To add to the fiscal deficit, the government is continuing its heavy financial support to the state-owned enterprises. The recent spike in food prices, and the short-sighted policy responses that accentuate volatility in prices, threaten to push a large number of people back below the poverty line, including millions in the less developed areas of the country. Structural forces augmented by adverse cyclical events e.g. shortage of irrigation water, fertilisers, and unbearable cost of pesticides, have put food prices on an upward trajectory that will not end soon. In the immediate future, carefully targeted assistance to the poor will be essential - both in terms of food and inputs necessary to increase food production in the coming crop season. A re-evaluation of investment priorities and feasibility of agricultural projects must be undertaken in the light of these price developments, accompanied by stronger efforts to boost agricultural productivity growth in order to mitigate any long-term rise in food prices. The explosion in food prices in Pakistan and its other South Asian neighbours is a threat to macroeconomic stability due to inflation. The rising fiscal cost of food subsidies, and the possible exchange rate depreciation in food importing countries, will further aggravate the sufferings of the poor. Although the fiscal burden in the shape of food subsidies in case of Pakistan is negligible, it will mount in the coming years given the sharp rise in food prices that is occurring in countries from which Pakistan imports various food items. The weakening of the Pakistani rupee against the US dollar may be partially due to food imports, which will push inflation rates higher in 2012. There are about 23 million households in our country and each one of them, whether poor or rich, is feeling the pinch of rise in prices. There are about 4.5 million persons in the labour force estimated to be unemployed. Even if all of them are from different households (which is not necessarily the case), 4.5 million households are feeling the pinch of unemployment. There is no fallacy in unemployment. The costs of unemployment to households are always real, as opposed to the costs of inflation. While major sources of inflation can be external there are internal factors too which can aggravate inflation. Many wheat growers associations in Punjab met to oppose the price fixing of wheat next year. The farmers said they wanted the international price for their wheat and not the local price, which Prime Minister Yousuf Raza Gilani had fixed in his magnanimity. They argued if the foreign growers, who export wheat to Pakistan, could be paid high prices for their wheat, why were they being denied? But if wheat is to be sold at international prices to our people, other imported items should also be sold on the same basis and without tax. So all that will aggravate inflation infinitely and deprive the government of large chunks of revenues. The political turmoil in Pakistan, rising inflation and power shortages have derailed the country's strong economic performance of the past five years. The government's high current expenditure is a major contributor to inflation. It constantly borrows more money from the central bank than it has budgeted for. In the first five months of the last fiscal year, it had borrowed the entire amount that was supposed to have been borrowed for the whole year. The government has continued to borrow since then. The fiscal policy has remained expansionary in the last few years. It fuels domestic demand and puts pressure on the current account deficit. It widens the investment-saving gap, which has to be financed externally. The financing of fiscal deficit through money creation adds to inflationary pressures. Increased government borrowing from the central bank can have serious consequences for the general price level. Except for the present Finance Minister, no one else in the government understands these simple economic principles. The writer is a retired secretary of the Government of Pakistan. He belongs to the former Civil Service of Pakistan. Email: shakeelahmad941@hotmail.com