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Prime Minister Imran Khan acknowledged yet again on 30 September 2021 that inflation is an issue but laid the blame on international commodity prices (imports) as a consequence of the pandemic.

Consumer Price Index (CPI) in September rose by 9 percent year on year - down from 11.1 percent in April this year and up from 8.4 percent in July and August. With the recent significant rise in the price of oil (and products) and its cascading effect on nearly all other items of general use there is a real concern that the October inflation may be in double digits.

Inflation is the key macroeconomic indicator critical to the general public's perception of well-being and unlike other macroeconomic indicators like current account deficit it is: (i) experienced at an individual/family unit level and claims that inflation is on the way down are unlikely to convince even diehard supporters if each rupee earned buys less than the week before; (ii) responsive in the short term to policy measures notably appropriate monetary policy (and not a fast eroding rupee - from 153 rupees to the dollar in May 2021 to over 171 rupees last week - or a discount rate close to double the regional average) as well as fiscal policy (not through high administered prices to meet costs of sustained poorly performing utilities nor high taxes on oil and products though the government has been unable to meet the 610 billion rupee budgeted target set from petroleum levy in the first three months of the year due to political considerations which, in turn, is likely to increase the budget deficit - a highly inflationary policy); and (iii) as rightly pointed out by Shaukat Tarin inflation in Pakistan is also due to colluders/profiteers operating with impunity both in the industrial and farm sectors however the ability of the incumbent government to rein them in, in spite of accusations and threats, is clearly lower than previous administrations. Imports/subsidies as policy measures to lower prices have also not proved effective so far.

On 4 April 2021, Prime Minister Imran Khan during his interaction by telephone with members of the public stated rather simplistically that there are three types of inflation. First, an item is available at different prices in different shops which, he added, could be controlled through administrative steps. In the case of vegetables and fruits he must be aware that price varies due to quality and a vendor's location.

Second, the Prime Minister cited the case of a farmer who sells his produce at a price, but the same item is sold at a much higher price in the market - a trend that Prime Minister Khan maintained "we are breaking... and will deliver vegetables and fruits directly from the market to the people, which will fetch a good price to the farmer and also reduce the prices for the people." The reference is clearly to the aarthis who have a generational hold on the poor farmers which realistically speaking is unlikely to be broken in a short period through extending direct credit to farmers.

And finally, Prime Minister Khan said that before the PTI government came to power, the dollar was at 124 and after 2018 it rose to 160, but the Prime Minister added "thank God the economy was now stabilizing and the rupee was strengthening. Its immediate effect is that the prices of diesel and petrol are falling, but when the dollar went from 107 to 150 rupees, it affected the electricity tariff." Five months down the line the rupee-dollar parity is above 171 and the Prime Minister is bafflingly quiet on the subject.

Information Minister Fawad Chaudhary while briefing the media after the cabinet meeting chaired by the Prime Minister on Tuesday last contended that price hike in urban areas is imported, due to an increase in the international price of our major imports - oil and products, sugar, wheat, cooking oil, pulses - while the situation in rural areas is relatively better owing to an increase in agricultural production.

His observations require further consideration as data released by the Pakistan Bureau of Statistics reveals that: (i) CPI (national) for urban dwellers rose by 9.1 percent and rural by 8.8 percent in September year on year; however month on month urban CPI rose by 2 percent while rural rose by 2.3 percent; (ii) food inflation one would have assumed would be lower in rural centres and this is reflected in the data with year on year CPI at 9.1 percent in rural and 10.8 percent in urban but again month on month rural dwellers suffered a rate of 3.7 percent against 2.3 percent in urban areas; and (iii) one would have expected the reverse in the case of non-food items as most non-food items are transported to rural areas which is borne out by the fact that year on year rural CPI registered 8.5 percent against 8.1 percent urban though month on month the situation is reversed at 1 percent and 1.1 percent urban.

Farm output projections for the current year are yet to be firmed up however data suggests that there is a serious shortfall in cotton output - from the projected 10.5 million bales to 8.46 million bales - which would necessitate importing the item for value-addition which may make our finished products uncompetitive vis a vis other regional countries.

If inflation is matched by higher incomes then the impact of inflation on the public is minimized. While private sector wages have generally not been raised this year the government, at the taxpayers' expense, raised salaries of civilian and military personnel for the ongoing year after a wage freeze last year with the objective of containing expenditure and reining in wage-push inflation. These objectives were not met due to the implementation of expansionary fiscal and monetary policies to deal with the pandemic reflected by the upward revision of inflation from the budgeted 6.5 percent to 9 percent in 2020-21. Additionally, the surge in suppressed demand due to industry- specific expansionary policies (particularly construction and automobiles) accounted for the growth rate of 3.94 percent last year against the projected 2 percent.

To draw an analogy from cricket inflation should be dealt with by good fielding to contain the piling of runs, instead of as the batting team intent on hitting the ball as far away as possible. Disturbingly, the Khan's economic team has been batting for the past three years. This is evident as the State Bank of Pakistan (SBP) continues to disclaim responsibility for inflation by blaming colluders/mafia and administered prices (by the government) while maintaining, to independent economists' chagrin, that its policies with respect to the discount rate and external rupee value are appropriate. And the Ministry of Finance routinely blames those operating outside the tax net, the colluders/aarthis, and not dwelling on its own inability to check current expenditure fuelling unsustainable budget deficits met through massive borrowing - policies that are highly inflationary.

To conclude, it is little wonder that the administration's narrative three years into its five-year tenure is finding less and less traction with each passing week. Ground realities and not rhetoric is the key.

Copyright Business Recorder, 2021


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