EDITORIAL: Higher inflation, mainly food items, is one of the biggest reasons for making this government unpopular. Mass voices are resonating with the opposition in the ongoing rallies - due to the brunt of higher prices. The divide between the urban and rural inflation is growing - rural inflation in 5MFY21 is at 10.9 percent as compared the 7.4 percent urban inflation. With over 40 percent of weightage in rural inflation being food items, high food inflation is pushing poor below the poverty line. The national CPI stood at 8.8 percent in 5MFY21 as compared to 10.8 percent in the same period of last year. The headline inflation is coming down; yet the number is high. The real problem is of rural inflation. It is pertinent to note that the previous CPI base was purely urban and yesteryears' inflation (prior to FY20) was only urban. Hence, as compared to inflation in the last regime, the performance of this government is not as bad as it appears.
The other problem is monetary policy consideration where the State Bank of Pakistan (SBP) is primarily looking at the headline inflation for setting policy rate. Had rural inflation not been incorporated into the system, the monetary policy response could have been different. Having said that, the new system is better where the holistic prices' impact across the economy is visible and is giving better information to monetary policy committee in making the decision.
The real challenge for the PTI government is to tame inflation. The core inflation is well in control. For example, the urban non-food inflation in 5MFY21 is standing at 4.1 percent. But at the same time, rural food inflation in the same period is recorded at 16.2 percent. Rural food inflation is at 4 times of urban non-food. Such disparities are needed to be considered while making policy decisions. Lower non-food inflation is arguing that the output gap is negative at 1.4 percent, according to SBP data, in FY20. This implies that the tightening policy in the last year is yielding results. The output gap must have been converging in the FY21 so far, as a number of industries are performing better. The leading economic indicators such as cement, automobile, fertilizer, FMCGs sales - all are showing decent recovery in this fiscal year to date.
However, the impact is yet to be seen on core inflation. Urban core inflation is standing at 5.5 percent and rural at 7.6 percent in 5MFY21. This is well in control and there are no signs of its growing. This implies that output gap is perhaps still negative and there are no pressures of demand side inflation. The impact of currency adjustment in FY19 must have been fully reflected in the prices. The PKR/USD was at 164 in July 2019; and since then it is hovering between 154 and 168. Inflation due to currency depreciation is being reflected in both food and non-food commodities. The impact on food commodities could have been lower; as prices in Pakistan were already at premium to international prices when the currency was artificially kept at a high rate in 2015-17.
However, there are other reasons for surge in food inflation in the past 18 months. In Pakistan, prices for many food items and their markets are regulated by provincial and district governments. That is not the best way to operate; but it is the reality. And governance failure of the current regime, especially in Punjab, needs no explanation. In wheat and sugar, untimely decisions of exports, disappearances of stocks in Sindh, then indecisiveness on imports and too much procurement to create shortage in the open market are a few factors contributing to higher inflation. There are other factors such as changing weather patterns, locust attack and rising input prices that also contributed to higher food inflation. In order to curb food inflation, government needs to reduce its role in fixing pricing and procurement. These are best left to market forces and the government should look at food security through input subsidy and direct injection to poor through Ehsaas programme.
Copyright Business Recorder, 2020
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