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EDITORIAL: Consumer price index (CPI) registered at 26.6 percent for October against 23.2 percent in September as per the Pakistan Bureau of Statistics (PBS). This is an outcome of policy decisions taken last month, paramount being the announcement of 90 to 100 billion-rupee subsidy to provide electricity at 19.99 rupee per unit to the five export-oriented sectors which, in turn, further shrank the already small fiscal space available that can be attributed to the sustained failure of successive governments to widen the tax base or indeed to ensure an equitable and fair taxation system.

An example is the wholesalers and retailers who account for nearly 19 percent of the country’s Gross Domestic Product at 7,299 billion rupees against the manufacturing sector’s 4,817 billion rupees and crops estimated at 3,040 billion rupees as per the Economic Survey 2021-22 — while their contribution to taxes is minimal. The Pakistan Muslim League (Nawaz)-led administration has time and again failed to impose taxes on this sector as they form an integral component of their electoral support base.

There is of course the argument that the rise in electricity prices (estimated at 89.59 percent last month) pledged by the government to the International Monetary Fund (IMF), accounts for the rise in October inflation figures; however, this ignores the impact of the subsidy to the exporters announced by finance minister Ishaq Dar as his predecessor Dr Miftah Ismail had earmarked only 20 billion rupees to support the exporters in terms of subsidising electricity for a maximum of three months this year.

Petroleum rates for the last fortnight (15 October to 31 October) remained constant while for the period from 1 October to 15 October prices of petroleum products actually declined: by 12.63 rupee per litre for petrol, 12.13 rupee per litre for high speed diesel, 10.19 rupee per litre for kerosene and 10.78 per litre for light speed diesel.

In other words, the prices of petroleum products did not contribute to a rise in inflation and given the decline in rates during the first fortnight of October should have contributed to lower inflation than before.

In this context, it is relevant to note that the OPEC+ decision to curtail production by 2 million barrels a day will limit the government’s capacity to generate revenue from petroleum levy (already at the highest allowed rate of 50 rupees per litre for petrol though there is considerable room to raise it on HSD), thereby inflation is projected to rise further in the current month.

The rupee-dollar parity, a major contributor to imported inflation, was on average 230.466 in September and declined to 215.5 in October. This implies that the causes of inflation can be sourced to domestic factors. Core inflation an adequate measure of these domestic factors impacting on inflation rose to 14.9 percent in October year-on-year against 14.4 percent in September.

The discount rate usually 2 to 3 percentage points higher than the rate of inflation, to ensure a positive rate of return, is 15 percent thus the Monetary Policy Committee may be compelled to raise the rate during its next meeting especially if the IMF’s (International Monetary Fund’s) ninth review is to be successful.

That in turn would raise the cost of borrowing for both the private sector (thereby making it difficult to compete internationally) and the government that may, unless expenditure is drastically curtailed, opt for a higher budget deficit that is also a highly inflationary policy.

Floods are an important factor in raising the price of food; however, the rise in food and non-alcoholic beverages was 16.3 percent in October over September with non-perishable items contributing 11.81 percent and perishable items 4.49 percent.

Given the penchant for making windfall profits by aarthis, (middlemen) this rise may also reflect administrative failures in checking the prices available to the common man.

To conclude, there is, therefore, a need for the economic team leaders to understand that the old measures used to strengthen the stranglehold of the elite on the country’s resources under the guise of a trickle-down theory (encouraging exports and/or output) can no longer be continued due to steadily worsening funding issues that reflect an inequitable and unfair tax structure.

The electricity sector at present has a circular debt of over 2.5 trillion rupees, requiring massive budgetary injections which the government cannot afford. Solutions are available but they all require a massive slashing of current expenditure and certainly not a rise in subsidies.

Copyright Business Recorder, 2022

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M. Hassan Nov 03, 2022 08:46pm
Inflation is more of an administrative issue than any other problem.
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