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EDITORIAL: Despite its best efforts the PTI government has not been able to get a handle on the ever-rising food prices in the country and food inflation remains a problem that has the prime minister constantly pushing his economic team to address it. Finance Minister Shaukat Tarin, at a presser, announced that the government would provide targeted cash subsidy on four essential food items—wheat, ghee, sugar and pulses—to Ehsaas programme recipients that represent the people below the poverty line. Business Recorder has always underscored the need for targeted subsidies instead of across the board interventions to ensure that the benefit accrues to the poor for whom it is meant and the cost to the exchequer remains limited. He also had acknowledged while briefing the Senate standing committee on finance that food inflation is a major challenge for the government but attributed it to the rise in prices of food commodities in the international market. The international price of ghee, he stated, has risen by 90 percent, pulses’ by 40 percent—items that Pakistan is importing—but added that the numbers indicate that the government is moving in the right direction, citing the example of the rise in auto sales in recent months.

Tarin’s strategy to deal with the issues prevailing in the farm sector are four-fold. First, he has noted that aarthis are catering to the financial needs of the poor farmers from sowing to sale of the produce in the market and are responsible for colluding to raise prices. His remedy is to reduce/end aarthis’ influence through issuing farmers cards, a form of debit card payable by the government and in the medium- and long-term to have the government set up cold storages, commodity warehouses and agriculture malls to curtail the role of the aarthis and end the exploitation of the farmers. However, the actual contribution of a consequent rise in the money supply on inflation is not being considered. It is critical to note that the government’s heavy reliance on borrowing to meet its expenditure has been a source of inflation during the past three years — domestic borrowing has risen from 16.5 trillion rupees in 2018 to over 26 trillion rupees today and this is a highly inflationary policy especially as the bulk of this amount is spent on current as opposed to development expenditure.

Secondly, the incumbent government has continued the flawed agriculture policies of the past wherein sugar was allowed to become a major product, at the cost of cotton, with surplus production requiring an export subsidy as and when the international prices were lower than in Pakistan while collusion ensured that the surplus did not lower the price of sugar. Subsidies to the poor, although necessary, even if and when targeted, are also inflationary as they raise government current expenditure.

Thirdly, oil and products contribute to transport costs of produce from farm to market – and in this context it is relevant to note that the incumbent government, of which Tarin now is an integral part, increased reliance on petroleum levy (PL) over the three years and in this year alone the budgeted revenue from this levy is projected at 610 billion rupees against 450 billion rupees last year. True, that the government has reduced the levy to almost zero on oil imports during the first two months of the year due to political considerations, as international prices have risen, yet it is safe to assume that the pressure to reactivate the levy will rise as and when the government begins to negotiate with the International Monetary Fund on the sixth review scheduled for this month.

And finally, the rupee erosion since May 2021 — from 153 rupees to the dollar to nearly 169 interbank — is feeding into the imports impact on domestic inflation. With reserves at a high of 20 billion dollars, a current account deficit that is not a source of concern, and a real effective exchange rate of around 99 (defined as a weighted average of a country’s currency in relation to a basket of currencies determined by comparing the relative trade balance of a country’s currency against that of each country in the index) the rupee continues to lose value against the dollar even when the dollar dips against other currencies. There is an emerging consensus that perhaps it is part of the strategy for the forthcoming talks with the IMF later this month to retain the 7 percent discount rate and allow the government space to implement its tax enforcing reforms that have yet to be implemented and in the meantime rake in higher tax collection as over 50 percent of FBR revenue is collected from imports and rupee depreciation has a positive impact on tax collections at the import stage because of the higher landed cost in rupees as a result of thereof.

Copyright Business Recorder, 2021


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