Recent reports indicate that the consumer price index (CPI), typically the
measure used to gauge inflation (a general and continuing increase in the price
level in an economy), has been on the rise.
اضافة اعلان
Inflation was
described by Milton Friedman, the father of monetary theory in economics, as “…
the one form of taxation that can be imposed without legislation”. In Jordan,
monetary policy (control of the money supply through open window operations and
interest rates) has proved, time and again, to be ineffective in combating
inflation. Therefore, fiscal and microeconomic policies should be utilized to
target inflation.
Not only is
inflation harmful to the economy in the short run, from a development
perspective, it also makes the rich richer, as the prices of their assets
increase, it makes the middle class pay more taxes, and makes the poor poorer.
The government
welfare, on the other hand, can improve with inflation; it simply collects more
taxes, provided that economic activity does not regress. John Maynard Keynes
once said: “By a continuing process of inflation, government can confiscate,
secretly and unobserved, an important part of the wealth of their citizens.”
The CPI in
Jordan, according to the Department of Statistics, reached 107.92 points in
July 2022, against 102.45 during the same month of 2021, thus recording a 5.34
percent increase. Cumulatively, the CPI average for the first seven months of
2022 reached 105.77 points, against 102.06 during the same period in 2021;
hence, there was an increase of 3.63 percent in consumer prices. This increase
is in line with expectations that 2022 will be inflationary due to supply chain
disruptions, the Russia-Ukraine war, and the increase in demand after the era
of pandemic-caused closures and curfews.
The quality of public spending needs to be improved in order to counter the inflationary pressure, which would further burden the poor, especially given the high unemployment rates, rising poverty, and massive closures of businesses.
The main
commodity groups in Jordan that contributed to the increase were “fuel and
lighting” (30.56 percentage points), “transport” (6.41 percentage points),
“rents” (4.48 percentage points), “culture and recreation” (2.92 percentage
points), and “health” (6.85 percentage points). Note that 37 percentage points of
the inflation were caused by commodities that are within the purview and
control of the government.
The quality of
public spending needs to be improved in order to counter the inflationary
pressure, which would further burden the poor, especially given the high
unemployment rates, rising poverty, and massive closures of businesses.
Government
expenditures on wages, pensions, and public debt servicing currently make up
more than domestic revenues (taxes and fees), causing the government to borrow
to pay wages.
Even though
there is little maneuverability in the government budget, public spending can
be made performance based, and debt management can be enhanced. Also, the
government should attempt to increase the economic growth rate to reduce the
debt to GDP ratio and pay back some of the debt, concomitantly. Bad, sudden,
and hasty public policies should be avoided at all cost.
At the
microeconomic level, since food constitutes a significant portion of the budget
of the poor, taxes and customs on food items should be reduced. Also, the
social safety nets should be strengthened.
There is talk
that the government is to lower fuel prices (which could simply be a rumor)
after having raised them five times this year. That would be a welcome move, as
it would lower the rise in the cost of transport in Jordan. Furthermore, any
monopolistic practices that raise prices, limit quantities through collusive
agreements or heightened concentration or abuse of monopoly power or dominance,
should be watched for and addressed.
Yusuf Mansur is CEO of the Envision Consulting Group and
former minister of state for economic affairs.
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