EDITORIAL: Pakistan Bureau of Statistics (PBS) data for July 2020, the first month of the new fiscal year, compared to June, the previous month, reveals a rise in prices of perishables (vegetables on average by 23.8 percent, eggs by 10.82 percent, chicken by 2.6 percent, meat by 3.97 percent), wheat (7.42 percent) and sugar (3.8 percent) due to what critics argue are delayed/flawed policy implementation of the federal government decisions while the federal government is laying the blame on the provinces specifically Sindh for not releasing its wheat stocks thereby creating a shortage, and petroleum and products which have witnessed yet another raise effective from Eid day - 1 August.
The reason for the rise in Consumer Price Index from 9.3 percent year on year basis in July 2020 compared to 8.6 percent in June 2020 and 8.4 percent in July 2019 is threefold. First, of course is the steady rise in the international price of petroleum and products post-Covid-19 that has contributed significantly to a rise in transport costs. The government's reliance on taxes on petroleum and products is significant and includes: (i) petroleum levy with total budgeted earnings for the ongoing year at 450 million rupees - a 73 percent increase from the revised estimates of last fiscal year (260 million rupees) and comprising 8.2 percent of total tax revenue envisaged for 2020-21 (5464 million rupees) though achieving the target is widely believed to be unlikely. The maximum levy allowed by parliament is 30 rupee per litre, a rate which was applicable in July but for August the government reduced the levy to 27 rupees per litre, 3 rupees per litre reduction, to limit the rate rise to 11.8 percent for the current month. However, few have appreciated this effort on the part of the government with direct implication on the revenue of the centre given that this levy is not part of the divisible pool mainly because an increase in fuel prices has an immediate trickle-down effect on most consumer items; and (ii) 17 percent sales tax across the board. As price of petroleum and products' rises so does the collections however sales tax is part of the divisible pool and the federal government's share is limited to 42.5 percent. Additionally, the fuel cost associated with producing electricity would also rise which, in turn, would increase its tariff and negatively impact the quality of life as well as raise input costs of domestically produced goods and services.
Second, the flawed policies of the centre as well as provinces that created artificial shortages of wheat and sugar. The country's economic team leaders relegate this factor in the raise in CPI to supply side issues and emphasize the need to effectively deal with cartels which remains a challenge not only because Competition Commission of Pakistan remains weak in enforcing its writ but also because many members of cartels hold senior government positions in administration after administration.
And finally, the reason for the rise in prices can be attributed to the incumbent government's penchant for unsustainable budget deficits (8.9 percent in 2018-19 to 9.1 percent in 2019-20 though this remains a projection with many analysts arguing that the actual figure would be closer to 11 percent) as well as increasing reliance on borrowing. Domestic borrowing, a highly inflationary policy, has increased from 3.2 trillion rupees in 2008 to 9.5 trillion rupees by 2013 to 16.4 trillion rupees in 2018 to a dangerously high level of 23.5 trillion rupees by May 2020. In this context it is relevant to note that the government also converted short term to long term debt. As per the SBP website, 17.6 trillion rupees is long-term debt, which is largely accounted for by issuance of Pakistan Investment Bonds last year when the discount rate was 13.25 percent. External debt of 38.6 billion dollars would be required for the duration of the IMF programme, scheduled ending delayed till at least the second quarter of 2023, as per the statement made by the government team.
The CPI which was a yardstick used by the SBP to set the discount rate is now higher than the discount rate of 7 percent. There is therefore a real and present danger that the Monetary Policy Committee may consider it appropriate to raise the rate which would have a further dampening effect on productivity and growth with a consequent negative impact on employment and inflation.
To conclude, while in other countries Covid-19 lockdowns contained inflation in Pakistan the opposite has happened and the reason is not the limited lockdown but the failure of the government to ensure that subsidized prices of essentials are available to the vulnerable (wheat available at Utility Stores Corporation is not edible and therefore is not being purchased) while sugar is largely absent from their shelves. The centre should focus on its macroeconomic policies that are contributing to a rise in CPI and the provinces must carefully monitor the prices of items available to the general public.
Copyright Business Recorder, 2020
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