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EDITORIAL: Pakistan Bureau of Statistics (PBS) data for July 2021 Consumer Price Index (CPI) reveals an increase of 8.4 percent year-on-year compared to a rise of 9.7 percent in June 2021 and 9.3 percent in July 2020. Granted that the decline in July relative to June should be appreciated with the government focusing on the trend; however, it has to be borne in mind that 8.4 percent is over and above the rise of 9.7 percent the month before and hence unlikely to be a source of satisfaction to the general public.

There is no ideal inflation rate though the Federal Reserve Board considers around 2 percent an acceptable rate; others consider a rate up to 3.5 percent as ideal with of course no-takers for a rate more than double that. It is important to note that economists point out that when an economy is not running at capacity, inflation raises output and needless to add Pakistan's economy has been running well below capacity from 12 May 2019 to March 2020 (when the then economic team leaders and the International Monetary Fund (IMF) projected an inflation rate of 13 percent based on the implementation of the severely contractionary monetary and fiscal policies); and from March 2020 to-date, the economy has been running at below capacity due to the pandemic (in spite of the smart lockdowns by the Khan administration). In addition, it is relevant to note that the Federal Board of Revenue (FBR) has projected additional revenue of 385 billion rupees in the current year premised on a projected 8.2 percent rate of inflation, or in other words, around 32 billion rupees per month (or nearly 9 percent of the projected increase in revenue). The FBR announced surpassing of the July 2021 target of 342 billion rupees by 71 billion rupees which may partly be accounted for by the higher than projected inflation in July and the rupee erosion (calculated at 153 rupees to one dollar which is at present over 163 rupees to one dollar) which anted up the revenue collected at import stage from the target of 46 billion rupees to 59 billion rupees.

So which commodities suffered the greatest rise in prices? Non-perishable food items rose by 0.65 percent in July compared to June 2021 (with major imported items including vegetable ghee rising by 6.7 percent and cooking oil by 6.56 percent) and perishable food items rose by 9.45 percent making one wonder what the Monetary Policy Statement of the central bank referred to when it noted that administrative measures had contained inflation. Transport accounted for a rise of 4.01 percent in July over June 2021 - a policy decision attributed to the rise in the international price of oil, with an eroding rupee adding to the cost to the Pakistani consumers, and the adjustment in the petroleum levy which would reduce the monthly target from non-FBR tax sources.

The items that were the largest contributors to inflation subsequent to going on an IMF programme in 2019 - housing, water, electricity gas and fuels - registered a 1.4 percent raise in July over June 2021 - a raise that was contained after the change of command at 'Q Block' (a euphemism for Ministry of Finance) as the incumbent finance minister has consistently argued against raising utility rates due to their impact on costs of production and in turn on the Gross Domestic Product. However, while he has also stated that the country would remain on an IMF programme what is not clear is how much will he be forced to compromise in terms of raising utility rates as a critical reform component of the Fund programme. At present, no alternate energy sector reform plan has been submitted to the World Bank, the lead agency in this sector, and the IMF has indicated that the Pakistani authorities have yet to approach them for initiating talks on the deferred sixth review. It is relevant to note that while Tarin is resisting attempts to raise the base electricity tariff he has not vetoed implementing fuel adjustment charges (international price of oil coupled with an eroding rupee) and quarterly reviews.

Needless to say, it is not time for complacency for two broad reasons; first, because the inflation rate is very high; and second, because it is unclear how long the government would be able to resist pressure from the Fund to raise rates. It has without doubt been brought home to Tarin by now that 2021 is not 2008 when he was appointed as the finance minister for two major reasons: (i) China Pakistan Economic Corridor (CPEC) had not yet commenced which has been a constant source of concern to the West and India with, sceptics argue, obvious implications on IMF flexibility as well as remaining on the Financial Action Task Force (FATF) grey list; and (ii) the reliance on borrowing was not as high as today - with domestic debt rising from 16.5 trillion rupees mid-August 2018 to over 25 trillion rupees today and while around 17 billion dollars additional external debt has been used to pay off past loans and as yet 5 billion dollars has been used to meet the rising current expenditures.

Copyright Business Recorder, 2021

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