Inflation

EDITORIAL: The Sensitive Price Index (SPI) for the week ending 4 November 2021 registered a rise of 0.67 percent as per the Pakistan Bureau of Statistics (PBS) with 28 items witnessing a rise in prices (price of 3 items rising by 5.88 percent) and 20 items remaining stable. This does not include the rise in the prices of petroleum and products as the government’s decision was notified at around 2am on 5 November, effective the same day instead of the usual practice of effectiveness from the first and the 15th of a month.

Hindsight indicates that the four-day delay may be attributable to the Prime Minister’s address to the nation on 3 November in which he announced a 120 billion rupee package targeted to subsidise wheat, pulses and cooking oil by 30 percent for those with income less than 31,500 rupees per month. Fed up of the incessant criticism of the regularly rising SPI, the federal cabinet in its wisdom has decided to do away with the weekly SPI and instead shall now only release the Consumer Price Index every month in conformity with the practice in India and Bangladesh.

Three observations are necessary. First, in his address the Prime Minister warned that petroleum prices would have to rise as there was a rising shortfall in the budgeted 610 billion rupee from petroleum levy (PL); however, he did not justify either the loss of revenue due to the four-day delay nor did he indicate that the government is working to implement reforms in the tax structure targeted to reduce dependence on indirect taxes like PL (whose incidence on the poor is greater than on the rich) in favour of higher reliance on direct taxes.

Second, by the time his address was telecast the prices of all three items - wheat, sugar and cooking oil - had risen, raising questions about whether there would be an adjustment in the incentive package and/or subsidy.

And third, and perhaps most concerning, was the fact that the Prime Minister did not take account of two basic economic facts: (i) any rise in current expenditure (subsidy) not backed by a rise in output is highly inflationary likely to exacerbate the situation if the subsidy amount is to be generated through borrowing – domestic or foreign; and (ii) current expenditure rise as a consequence of the subsidy would raise the budget deficit which again will fuel inflation. The effect of the measures announced by the prime minister to mitigate the impact of inflation on the poorer segments of society would subject them to further inflation.

The SPI notes that RLNG increased year on year by 15.21 percent, though the Prime Minister in his address did not mention the contribution of appallingly poor management by the historically largest team of federal ministers, ministers of state, advisors, and special assistants this country has ever had. It is by now public knowledge that second year running there has been an inordinate delay in importing RLNG which has caused severe supply shortages with implications on the quality of life of people and on productivity.

Additionally, Fakhr Imam, the Minister for National Food Security, in a press briefing last Friday claimed that the output of all major crops is on the rise – a claim that is irrelevant because while the contribution of agriculture to GDP is a little less than 20 percent the contribution of major crops is only 6.87 percent with livestock at 11.5 percent.

Besides, the government continues to import sugar and wheat reportedly to reduce prices charged by, according to the government, the “mafia”, with stocks either not being released, as publicly noted by adviser to the prime minister on finance Shaukat Tarin, or the quality specifically that of imported sugar is simply not in demand for reasons of appearance.

And finally, the PBS (Pakistan Bureau of Statistics) data continues to cite prices of sugar and wheat as per the controlled rates which are not being effectively implemented. Inflation data, the government needs reminding, cannot be manipulated because its impact is felt at an individual level as and when a person goes to the market for basic provisions.

Blaming the pandemic or drawing comparisons with the West and/or regional countries is a narrative that has passed its ‘sell-by date’ because inflation in Pakistan is not only double that in other regional countries but wages have lagged behind due to the severely contractionary monetary and fiscal policies implemented post-May 2019 and though there was considerable easing post-pandemic, yet, contractionary policies are continuing to this day compared to other countries.

To blame the IMF (International Monetary Fund), however, is not quite kosher for the simple reason that the Fund insists on revenue generation that is achievable but not without reforms that would end the elite capture of resources and a cut in expenditure that is politically challenging but possible. If the government can break from these constraints and begin to implement structural reforms, Pakistan would be out of the economic impasse it finds itself in today.

Copyright Business Recorder, 2021