Dr Omer Javed
Prime Minister, Imran Khan reportedly indicated that inflationary pressures are mainly due to imported inflation, as food and oil prices have risen sharply internationally. To this extent, he is mostly right, given domestic market failures of a general nature are also playing their usual role, but it is mainly imported inflation that is the main driver of inflation. The other thing about inflation he reportedly indicated is that this imported inflation is a temporary phenomenon. I hope he is right, but this may not be as simple as the PM thinks, and this imported inflationary channel may remain significant for a longer period of time.
OPEC+ group of countries overall have shown their eagerness to keep their oil revenues at high levels, and in this regard, have been quite ruthless in oil supply curtailment to push up prices even when oil demand nose-dived quite aggressively since around April 2020. While others like Saudi Arabia reportedly want higher level of oil revenues so as not have to increase domestic taxes. Moreover, a sharp rise in oil prices over the last many months has reportedly meant high oil revenues for Saudi Arabia, whereby a recent Bloomberg article ‘Saudi Arabia’s oil revenue surges ahead of OPEC+ meeting: chart’ pointed out in this regard: ‘The kingdom is earning more money from oil exports than at any time since 2018, as the global economic recovery and OPEC+ production cuts boost prices.’ This also highlights an inherent contradiction, whereby on one side oil exporting countries jack up prices by strongly curtailing supply, and on the other, are benevolent enough to provide oil payment deferment to countries from time to time; but which after all these countries have to make payment for subsequently.
That oil supply will reportedly only be slowly increased was highlighted in an October 5, 2021 Financial Times (FT) published article ‘US hits 7-year high after Opec+ resists calls to accelerate production’ in the following words: ‘US oil prices rose to the highest level in seven years after Opec and its allies declined to accelerate plans to increase crude production, snubbing calls from the White House to help tackle a growing global energy crunch. Europe and Asia have been gripped by tight energy supplies that have pushed natural gas and coal prices to the highest level on record, while oil prices have been rising steadily as the world economy has rebounded from the depths of the coronavirus pandemic. But the expanded Opec+ group… said on Monday it would stick with a plan formulated this summer of only gradually increasing oil production by 400,000 barrels a day each month, despite warnings of a growing deficit between supply and demand.’ This further underlines the proposition that unlike what PM Imran Khan thinks, imported inflation channel may remain highly active beyond the short-term.
Vaccine hoarding, and non-removal of intellectual property rights (IPRs) on vaccine production, not even temporarily during the pandemic have resulted in serious supply shortages of vaccines – especially through the WHO-led Covax programme, which was tasked to boost supply to developing countries, and at a much-subsidized rate – being faced by the developing countries, particularly Africa. Highlighting the dire situation of vaccine inequality, a recent article ‘Covid-19 and vaccine patent rights’ in The Irish Times pointed out: ‘Less than 1 per cent of people in low-income countries are fully vaccinated, compared to 55 per cent in rich countries. Government pledges of redistributing vaccines are very welcome but most will only be delivered in 2022, even 2023, and potentially millions will die as a result.’ This has allowed new and even more potent variants of Covid to keep appearing from those places in the global south, which have lagged far behind in terms of inoculation.
Hence, supplies of both oil and vaccines are likely to remain quite sticky in terms of increasing, because in both cases selfish interest of countries that control supplies is highly titled towards overly catering to the needs of their domestic economies, and voter base and citizens generally. So the temporary nature of imported inflation may remain a pipe dream, especially over the medium term, since this selfish attitude may not allow quicker rollback of pandemic, and the impact of climate change crisis; where on one hand rich countries have remained reluctant to provide anywhere near to what they had promised in terms of climate finance to developing countries, and on the other, are slow in terms of needed climate action from them as indicated through the Paris Agreement in 2015.
The gravity of situation was highlighted by the International Monetary Fund (IMF), as pointed out by Guardian’s environment editor, Damian Carrington, in his recent article as: ‘The fossil fuel industry benefits from subsidies of $11m every minute, according to analysis by the International Monetary Fund. The IMF found the production and burning of coal, oil and gas was subsidised by $5.9tn in 2020, with not a single country pricing all its fuels sufficiently to reflect their full supply and environmental costs. Experts said the subsidies were “adding fuel to the fire” of the climate crisis, at a time when rapid reductions in carbon emissions were urgently needed.’
Moreover, an article published in July in Economist titled ‘Despite climate concerns, demand for dirty fuels is surging’ pointed out: ‘Governments say they want to build back better and greener, and have announced ambitious plans to kick the fossil-fuel habit. …Despite the grand talk, though, fossil fuels are resurgent. A recent report from the International Energy Agency makes for sobering reading. Global electricity demand is forecast to grow by nearly 5% in 2021 and by 4% in 2022. Fossil-fuel-based power will probably make up 45% of the extra demand this year and 40% next year. (By contrast, it made up about a quarter of new power generation in 2019.)’
Food prices internationally have also sky-rocketed during the pandemic at the back of once again supply chain crisis. A September 2021 Economist published article ‘High food prices are here to stay’ highlighted the following: ‘An index compiled by the Food and Agriculture Organisation, a UN agency, shows that food prices were a third higher in August than a year before. They have risen in 13 of the past 15 months, and are close to their peak of 2011. Poor countries are especially vulnerable to pricier food imports.’ Moreover, the article remained little optimistic of a fall in prices in the near future, whereby it indicated likelihood of return of La Niña during this winter, shortage of containers given a sharp return of trade, and global warming may all make it difficult to see decline in prices. It highlighted in this regard ‘Yet there are reasons to think relief is premature. …The most enduring headache, however, may be global warming. Already a rise in average temperatures is changing production patterns in some of the world’s breadbaskets, and not always in a good way. …Food prices are likely to remain a hot topic well after covid-19 is under control.’
Supply chain disruptions due to climate change – from floods to wildfires for instance – have already been quite evident, and the selfish, carefree attitude as indicated by the subsidy programme, and energy mix in high favour of fossil-fuel usage, are highly indicative that imported inflation may be at least more of a medium-term phenomenon. This situation calls for a quick and strong move towards autarkist policies, so that the country could be saved from the imported inflation, which most likely may not be a short-term phenomenon, and may even surface again and again, especially if effective climate change strategies are not implemented, and in a timely way. There is an urgent need for greater self-reliance in meeting domestic consumption needs, and in bringing more sustained macroeconomic stability.
(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at the International Monetary Fund)
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