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A frequently expressed view in the media, especially by spokespersons for the government, is that the rate of inflation in Pakistan is not significantly higher than the other major countries of South Asia. Also, it is asserted that petroleum and other prices are relatively low in Pakistan.

The objective of this article is to identify the rates of inflation from 2018 to 2021 in the four major countries of South Asia, namely, Bangladesh, India, Pakistan and Sri Lanka. This analysis is undertaken to determine the causes of the variation in inflation in these countries.

The four-year average from 2018 to 2021 of the annual rates of increase in the CPI is given in Table 1 below. The rate of inflation in Pakistan has been higher by 2 to 3 percentage points over the other three South Asian countries.

=================================================================
Table 1
=================================================================
Average Rate of Inflation in major South Asian Countries
=================================================================
Countries                                            2018 to 2021
-----------------------------------------------------------------
Bangladesh                                                    5.6
India                                                         5.0
Pakistan                                                      7.6
Sri Lanka                                                     4.6
=================================================================
Source: IMF, WEO

Pakistan, in fact, had the lowest rate of inflation in 2018. The biggest difference is observed in 2020, when the inflation in Pakistan rose to a double-digit rate of almost 11 percent. In 2021 the difference is over 3 percentage points with respect to each of other three South Asian countries.

The IMF (International Monetary Fund) in its recent World Economic Outlook has projected that the rate of inflation in FY 21-22 will be 8.5 percent in Pakistan, as compared to 6.2 percent in Sri Lanka, 5.8 percent in Bangladesh and only 4.9 percent in India.

There are a number of factors which explain the variation in the rate of inflation in the four countries. The first is the GDP growth rate. With a higher GDP growth rate there is generally a faster expansion in the domestic supply of basic commodities and thereby less increase in prices. Second, there is the phenomenon of 'imported' inflation. All four countries are oil importing countries and face the same international prices. They also have similar import-to-GDP ratios, with the exception of Sri Lanka. But higher inflation could also be caused by faster depreciation in the value of the national currency.

Third, the rate of expansion in money supply could vary significantly among the countries due to various factors including the extent of bank borrowing for financing the budget deficit and the rate of expansion in credit to the private sector.

Table 2 gives the magnitude of the causative factors for the four countries.

=====================================================================================================================
Table 2
=====================================================================================================================
Magnitude of Determinants of Inflation, 2018 to 2021
=====================================================================================================================
Countries                 GDP Growth          Cumulative           Imports             Current             Cumulative
                         Rate Average        Devaluation         as % of GDP       Account Deficit          Change in
                             (%)             of Currency                             as % of GDP         Money Supply
                                                                                                         as % of GDP*
---------------------------------------------------------------------------------------------------------------------
Bangladesh                   6.5                 3.2                 21.4                -1.9                     1.0
India                        2.3                 9.4                 21.0                -1.2                    14.8
Pakistan                     2.8                 48.9                20.3                -3.3                     4.8
Sri Lanka                    1.5                 24.3                29.3                -2.5                     4.2
=====================================================================================================================
*Up to 2020
Source: IMF, World Bank

The GDP growth rate varies substantially among the four countries. Bangladesh has performed exceptionally well with an average GDP growth rate of 6.5 percent from 2018 to 2021. India was also showing high rates of growth up to 2020. The impact of COVID-19 was large and led to a fall in the GDP of 7 percent. Both Pakistan and Sri Lanka have relatively low growth rates.

There is also enormous difference in the extent of devaluation of the national currency in the last four years. It is as low as 3 percent in Bangladesh and 9 percent in India. It is much higher in Sri Lanka and Pakistan at 24 percent and 49 percent, respectively. The rate of expansion in money supply (M2) has also been more rapid in India, and relatively limited in the other countries.

Overall, it is clearly visible that the primary reason for the difference in the rate of inflation in the four South Asian countries is the extent of devaluation of the national currency, and slower economic growth. Pakistan has seen a much higher fall in the value of its rupee in the last four years and experienced lower GDP growth.

Turning to the level of individual prices of petroleum products and electricity, these are presented as of October 18, 2021, in Table 3.

Contrary to perceptions, Pakistan has a higher price of HSD oil than Bangladesh or Sri Lanka. It is the lowest in gasoline. Diesel is used more for transportation of goods. Therefore, like the other South Asian countries, there should be a bigger difference between motor spirit and HSD prices in Pakistan.

==========================================================================================================
Table 3
==========================================================================================================
Petrol and Electricity Prices
==========================================================================================================
Countries                                  POL Products                            Electricity
                                  Gasoline             Diesel             Domestic              Businesses
                                       (Cents per liter)                         (Cents per kwh)
----------------------------------------------------------------------------------------------------------
Bangladesh                          1.04                0.76                0.07                      0.11
India                               1.42                1.30                0.08                      0.11
Pakistan                            0.81                0.79                0.05                      0.15
Sri Lanka                           0.92                0.55                0.07                      0.06
==========================================================================================================
Source: www.globalpetrolprices.com

The electricity price is the lowest for domestic consumers and the highest for businesses in Pakistan. Here again, there is a case for reducing the difference between domestic and industrial electricity tariffs in Pakistan.

The IMF has projected a fall in the rate of inflation in India and Pakistan in 2021-22. It expects the inflation rate to remain virtually unchanged in Bangladesh and rise by 1 percentage point in Sri Lanka.

Clearly, the impact of the ongoing commodity price boom appears to have been understated. The likelihood is higher that the rate of inflation in Pakistan and Sri Lanka will rise to a double-digit rate while it may increase by 2 to 3 percentage points in Bangladesh and India. Pakistan will continue to have significantly higher inflation than the other major South Asian countries.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2021

Dr Hafiz A Pasha

The writer is Professor Emeritus at BNU and former Federal Minister

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