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The Sensitive Price Index (SPI), comprising 51 essential items, collected from 17 markets in the country, recorded a decrease of 0.07 percent during the week ending 12 November 2020 over the week ending 5 November 2020. Before hailing this decline as a step in the right direction a few observations are in order.

The single highest weightage in calculating the SPI is given to electricity charges - weight of expenditure group in percent (lowest combined) 8.36 and 12.9 percent – reflects the decision of the government to reduce tariffs to 3.85 rupees per unit in the week ending 12 November 2020 from 3.96 rupees per unit in week ending 6 November 2020 – a decline of 9 paisa per unit or negative 2.78 percent. The per unit price of electricity in the week ending a year before – on 14 November 2019 was 4.22 rupees.

The decline of 9 paisa per unit from 6 to 12 November 2020 is not indicative of improved sectoral performance but due to a Cabinet decision early October 2020 to extend 14.38 billion rupee subsidy with the objective of not passing on the impact of quarterly tariff adjustment and fuel component adjustment, as proposed by the regulator Nepra, with the objective of keeping distribution companies tariffs unchanged for all categories of consumers reportedly due to political considerations. This gives rise to three serious concerns.

First, the decision not to pass on the quarterly tariff and fuel components adjustment to all categories of consumers is violative of the agreement signed by the economic team leaders with the International Monetary Fund (IMF) dated July 2019. They pledged on behalf of the government and the people of Pakistan in the document uploaded on the Fund’s website to “adjusting tariffs in line with the regulator’s determination. We have for the first time implemented a quarterly automatic tariff adjustment in the electricity sector by about 10 percent to generate 150 billion rupees in additional revenues to reduce the circular debt accumulated over the first half of Fiscal Year 2019 (prior action)…..ensuring regular and timely notifications for end-consumer tariffs in the electricity sector. Over 200 billion rupees of new circular debt were accumulated in the first half of Fiscal Year 2019 from delays in updating tariffs. Introducing automaticity of quarterly tariff adjustments, similar to the process followed for automatic monthly fuel price adjustments, will be an important step to recover costs in a timely manner and reduce the flow of circular debt. We will submit to parliament by end December 29019 changes to the Nepra Act to (i) ensure full automaticity of the quarterly tariff adjustments and (ii) eliminate the gap between the regular annual tariff determination and notification by the government (structural benchmark).”

This pledge/agreement was in line with the statement by the Minister for Energy Umar Ayub in March 2019 (two months before the staff level agreement was reached with the IMF) that the circular debt rose by 450 billion rupees in one year due to delays in tariff determination, absence of a proper plan to stop pilferage and power supply to high loss feeders though he claimed success in generating 40 billion rupees in power sector revenue in three months “with the kunda culture being eliminated by public representatives”. Clearly, the pledge to the Fund was violated given that today the circular debt is over 2.3 trillion rupees.

In other words, one of the stumbling blocks in reaching an agreement with the Fund on the second mandatory quarterly review, a precursor for the release of the second tranche under the 6 billion dollar extended fund facility, is in relation to the October 2020 cabinet decision. And its outcome may well be a delay at best or a suspension of the IMF programme at worst that would compromise the government’s capacity to procure foreign loans from official sources and significantly raise the cost of borrowing from the external commercial banking sector as well as through issuance of Eurobonds/sukuk.

And for information of the Prime Minister even though foreign borrowing declined from 166 billion rupees July-September 2019 to 161 billion rupees in the comparable period of 2020 due to what was claimed the rupee gain vis a vis the dollar yet it is relevant to note that the 1.2 trillion rupee markup and principal payment as and when due in the revised estimates of last year are not taken into account in this year’s budget as the government has deferred these payments on offer by creditor nations. And domestic debt has risen by over 170 percent in the first quarter of 2020 compared to the first quarter of 2019.

Secondly, the concern would no doubt be that in spite of talking about merging the subsidy programme and making it more targeted, a long standing demand of multilaterals, the government, two years and three months down the line, has yet to undertake measures to ensure that subsidy is targeted. A cell has been created and it is unclear when the report and associated recommendations would be approved by the cabinet and implemented.

And finally, the subsidy, though amounting to only 14.38 billion rupee (to implement a decline in electricity charges in the week ending 12 November from the one ending 6 November 2020) is an inflationary policy as it may raise the budget deficit unless the government checks expenditure which has not been significant to date.

Wheat flour per 20kg bag, accounting for 6.13 weightage, declined by negative 0.47 percent as per PBS data - from 988.94 rupees on 4 November 2020 to 982.7 rupee per bag in the week ending 12 November 2020. However, surveys indicate that this controlled price is only available in the government operated Utility Stores Corporation and its demand has shriveled because it is reportedly not fit for human consumption.

Nine other commodities were cited by PBS as being responsible for a decline in the SPI in the week under review from the one before: tomatoes, pulse (moong, masoor, and gram), gur, garlic, onion, rice (irri-6/9), and mutton.

All in all 11 out of the 51 commodities (21.57 percent) witnessed a decline in prices while 18 (35.29 percent) witnessed a rise and prices of 22 items (43.1 percent) remained unchanged. And in this context it is relevant to note that prices of petrol super and high speed diesel were shown as remaining unchanged though these particular items will show a decline in next week’s SPI calculation as the government has opted to reduce the prices not only by passing on to the consumers the lower international price but also by reducing the petroleum levy and collections under the unchanged General Sales Tax of 17 percent would decline automatically as the price declines. This in turn would have repercussions on government revenue of slightly under 2 billion rupees if limited to the next two weeks. However, if this is sustained then the impact on revenue and consequently on the budget deficit would rise.

To conclude, the government has reduced its taxes on petroleum and products as well as lowered electricity rates that would reduce the government calculated SPI however as the public has witnessed in the past a decrease in the prices of these two items may generate a slight increase in disposable income however the prices of all other products are not expected to register a commensurate decline. To reduce prices would require a revisit of macroeconomic decisions (fiscal and monetary policies) rather than looking at the micro picture or focusing on one or two commodities of general use for example sugar and wheat.

Copyright Business Recorder, 2020