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In our last article we had expressed the hope of potential turnaround in the economy. Some early data for the month of September has been released which continue to show mixed trends.

The most notable data is on consumer price index (CPI). After rising for three consecutive months of June (21.3%)-July (24.9%) and August (27.3%), the year-on year (YOY) CPI has come down to 23.2%. This is a very positive development. But we have to be mindful of the factors contributing to this decline. Surprisingly, food inflation has continued its aggressive uptick. As against 28.8% in August in urban areas, food inflation has clocked 30.8% with a hefty 5.2% increase month-on month (MoM).

A similar increase is observed in the rural areas where the index has been recorded at 32% and a month-on-month increase of 5.7%. The pressure is released from non-food inflation which has come down drastically in the urban areas from 24.7% to 15.2% with a month-on-month drop of 6.6%. In rural areas it came down from 27.5% to 20.1% with a month-on-month drop of 4.9%.

Similar trends are also visible in sensitive price index (SPI), which declined from 34.0% to 28.6% and wholesale price index (WPI), which declined form 41.2% to 38.9%. On the other hand, the core inflation has continued its rising trend as it climbed in urban areas from 13.8% to 14.4% with a hefty increase of 0.9% on month-on-month basis. With rising core inflation and policy rate at 15%, there seems to be little room for a downward correction in interest rate in the near future.

Looking at average inflation for the first quarter Jul-Sep we see a level of 25.11%, which is unprecedented. Last year this was at 8.58%. Such a massive inflation is genuinely pushing the fixed income groups into poverty.

Some analysts have expressed reservations on CPI and have wondered what basis has constituted a significant reduction in price of electricity. The basis essentially is the withdrawal of fuel adjustment charges for the users of up to 300 units of electricity which are substantial, more than 50%. The government has yet to announce when the said adjustment would be finally recovered. Very likely it would be staggered in installments during the rest of fiscal year.

Notwithstanding the above, the recent drop in petroleum product (POL) prices would help release the pressure on prices. It is contended that there is an element of fiscal indiscretion that may run counter to the IMF conditionality. Specifically, it is related to some reduction in petroleum levy contrary to the required increase.

It may be noted that the PM had met the MD-IMF on the sidelines of UN meetings, where he requested her to allow some freezing of POL taxes for at least a quarter. Reportedly, she was sympathetic but needed consultation with her team. A day before the price reduction was announced, the new FM held a virtual meeting with the Mission Chief. The FM has defended his decision in a TV interview asserting that he is mindful of the program imperatives and would deal with it when the occasion arrives.

It may be a bit early to announce whether a sustained drop in inflation has begun to occur, particularly because of flood and its after-effects.

The FBR data has shown continued achievement of own targets. As against a target of Rs.1609 billion, actual collections amounted to Rs.1635 billion. Last year the Jul-Sep collections amounted to Rs.1395 billion. The year thus has registered a growth of 17%, which is quite impressive.

The trade data for the first quarter has shown further improvements. Jul-Sep exports were recorded at $7.1 billion compared $7.0 billion last year, showing a small increase of 2%. Clearly, it signifies emerging difficulties in the global markets as they face an impending recession.

On the other hand, imports were recorded at $16.3 billion, showing a decline of 13% relative to the same period of last year. In our view, imports are still high and would argue for keeping them below $5 billion per month as oppose to $5.4 billion as at present.

The news from the forex market is significantly positive. There is a sustained and uninterrupted rise in the value of rupee against dollar. From nearly Rs.240/$ the interbank exchange rate has fallen to Rs.225/$, an improvement of nearly 10%. Is this a sustained recovery? Our view in this space has been that the rupee was highly under-valued and was a result of speculation, administrative failures and lack of confidence. It seems the government is moving strongly against speculative activities and plugging the administrative failures. Further gains would indeed depend on establishing a reputation of punishing the delinquent elements.

Beyond these measures, we have to hope for continued easing of key import prices such as oil, edible oil, wheat, steel and coal.

The trends are so far in the right direction but not steady. The oil dropped to $87.5/barrel but has started to climb back to $90/barrel and there are plans by OPEC+ to cut production by one million barrels a day, which is contributing to resurgence in its price. Palm oil has come down to below its level last year and should therefore help the import bill. Coal unfortunately is on the rise throughout the year from its levels during last year. Steel has come down significantly and remains below the last year’s levels. Wheat is coming down but is still slightly above the last year’s levels.

This is a mixed picture of commodities prices. We cannot be sure if we are going to witness a significant drop in import bill because of changes in terms of trade in favor of Pakistan. The cotton price is also coming down after staying above the last year level throughout this year. It is already below the high level of last year and close to last year’s level of $1/lb. This would not be helpful for our exports.

Under the circumstances, it is imperative that we keep our guards fastened and not take actions which may affect our nascent recovery. Many economists are predicting that global recession has arrived but it has yet to make its full mark. We have been stating that recession led drop in prices of key commodities will help our terms of trade and ease our external and inflationary pressures.

Copyright Business Recorder, 2022

Waqar Masood Khan

The writer is a former finance secretary, government of Pakistan

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