EDITORIAL: December 2022 headline inflation (Consumer Price Index) rose by 24.5 percent as per the Pakistan Bureau of Statistics (PBS) – 0.7 percent higher than the November figure; however, this containment as per pro-government sources in no way reflects the eroding income of a low/lower middle class income earner as general prices rose by a whopping 24.5 percent in December against a rise of 23.8 percent in November.
In recent months, the December CPI compares to July 2022 CPI of 24.9 percent with possibly a plethora of marriage ceremonies a major contributing factor during these two months.
Two observations on the data released by PBS are in order. First, the general CPI year on year is higher for rural areas (28.8 percent) compared to urban areas (21.6 percent). This includes food inflation which was 37.9 percent in rural areas compared to 32.7 percent in urban centres while non-food inflation, no doubt due to the higher transport costs involved, registered a 14.8 percent increase in urban areas while in rural areas it was 20.7 percent. Inflation in rural areas, according to the data, is raising the average rate considerably.
The reason for this discrepancy is to the larger share of food and beverage components in the calculation of rural inflation (40 percent) as opposed to urban (30.42 percent) baskets with the rural population spending the bulk of its income on food.
However, one would have assumed that this 10 percentile difference would be more than evened out with the 27.03 percent weightage in urban areas given to housing, water, electricity, gas and fuels against the rural area weightage of 18.49 percent.
Secondly, the key question is whether the International Monetary Fund’s (IMF’s) prior to ninth review conditions as well as the anticipated post-ninth review success conditions would exacerbate the CPI to well beyond the reach of the common man in rural areas.
The Fund requires a further raise in electricity/gas rates to achieve full cost recovery and begin the process of eliminating the over 2.5 trillion rupee circular debt (a massive drain on the country’s scarce resources), withdrawal of subsidy on tube-wells (which would ante up rural inflation directly), and the adoption of a flexible exchange rate that would preclude the widening differential between interbank, quoted open market and the actual open market rates at which dollar would be available that in turn would ante up the price of imports, particularly tea and cooking oil.
While agriculture is a provincial subject yet it impacts on the macroeconomy through shortages, which have to be met with imports as in recent post-flood times, allowing exports in spite of projected shortages in the country with a case in point being the December 2022 decision of the Economic Coordination Committee to allow exports for reportedly political considerations, and a cursory reliance on revenue from the farm sector by all provincial assemblies due to imposing an insignificant tax on the income of rich landlords even though their incomes compete with the profits of industrial units.
Core inflation rose by 0.1 percent in December to 14.7 percent – a contained raise that would no doubt put pressure on the State Bank of Pakistan to raise the policy rate from the existing 16 percent. The policy of a high rate has been opposed by Pakistan Democratic Movement (PDM) coalition government in general and the incumbent finance minister in particular as it raises the cost of doing business as well as the cost of domestic borrowing by the government; however, with the real interest rates in the negative at present, it is unlikely that the policy rate will not be raised though one would expect the current economic team leaders to negotiate as low a raise as possible with the Fund team.
It has been widely reported that during the recently concluded two-day National Security Committee meeting it was agreed that abandoning the Fund programme was no longer an option and as a consequence inflation would rise significantly if the conditions – prior and post-ninth review – are to be met.
Sadly, the actual rise was not discussed, perhaps not even quantified, but estimates project a raise of at least 6 to 7 percentage points in the remaining six months of the year. Thus CPI would rise to more than 30 percent, partly due to domestic fiscal and monetary policy tightening as required by the Fund, and partly due to exchange flexibility.
Countries in Asia that exceeded the inflation rate are Sri Lanka at 57.2 percent, reflecting the need for Pakistan to stay on the Fund programme or else face even higher inflation, the highly sanctioned Iran registered 52.2 percent, and Lebanon with its unique socio-economic and political problems with 142 percent.
The question is whether the general public would be able to withstand inflation with income in the private sector frozen due to a dip in economic activity since the onset of Covid-19 followed by the floods or whether it would tip the balance in favour of a spontaneous civil unrest.
While the government has repeatedly stated, and is fully supported by the Fund, that the poor and vulnerable will be protected through the Benazir Income Support Programme yet it would have to create more fiscal space than is in fact available.
Copyright Business Recorder, 2023
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