ISLAMABAD: The government has acknowledged that increasing the policy rate by the State Bank of Pakistan (SBP) has not resulted in containing inflation, but created some unintended consequences for real economic activity and burdening government expenditure, revealed Economic Survey 2022-23 released here on Thursday.
The survey said that Pakistan’s economy has been experiencing food and energy-led inflation during the period as the general price level persistently remained on the rise as a result of other factors too including dwindling foreign exchange reserves and the resulting currency depreciation, shortage of essential crops due to flash floods and the political and economic uncertainty.
In response to this recent price hike, the SBP has raised its policy rate from seven percent in June 2020 to 21 percent in April 2023 to contain inflation. It said, “the tight policy stance, taken by SBP, has not resulted in containing inflation, while creating some unintended consequences for real economic activity and burdening government expenditure. There seems to be a positive co-movement between the inflation rate and the interest rate in Pakistan.
It added that this, however, does not indicate whether causality runs from the interest rate to the inflation rate or the other way around. Therefore, we go deeper to analyse the issue further. First, high-interest rate has a positive effect on the cost of borrowing, part of which is passed on to consumers by producers.
This makes the interest rate and inflation rate positively correlated. Moreover, the interest rate has negative consequences for investment due to the high cost of borrowing for both fixed investment and working capital.
This translates into a slowdown of economic activity, especially in the industrial sector. Same thing happened in Pakistan in the recent past. This further added to supply shortages and kept the inflation rate high. Hence, monetary policy remained ineffective in targeting inflation as supply-side bottlenecks were not simultaneously removed.
Second, the food inflation is more pronounced. This component of the inflation rate can be responded through interest rate only to the extent it has second-round effect on the overall inflation, as reflected in the core inflation.
However, food component of inflation is directly insensitive to the interest rate and can be more effectively managed through market integration, easy transportation from farm to market, better access to information, and regulating retailer’s margin through district price committees. Moreover, Pakistan’s economy experiences cost-push inflation due to its over-reliance on the international commodity market. Hence, inflation in the country is largely an outcome of deficient domestic supply.
The survey said that in the first 10 months of the current fiscal year, inflationary pressure has persisted as it is the 18th consecutive month since November 2021 witnessing double-digit inflation. Consumer Price Index (CPI) in April 2023 stood at 36.4 percent on a year-on-year (YoY) basis which was higher from 35.4 percent in the previous month and 13.4 percent in April 2022. On average, CPI inflation, recorded at 28.2 percent during July-April FY2023 as against 11.0 percent in the same period last year.
The survey said that the US monetary policy measures have appreciated the US dollar against the other currencies of the world including the Pak rupee.
During FY2022, Pak rupee was depreciated by around 23percent, while during the current fiscal year Pak-rupee depreciated by 28.4 per cent, that is from Rs204.6 in end June 2022 to Rs285.4 on 1st June 2023.
The current inflationary pressure in the domestic market is being impacted due to exchange rate depreciation in FY2022 and FY2023 as Pakistan imported crude oil, edible oil and pulses, from the global market. Government is cognizant of the current inflationary spiral in the country and taking possible measures to provide relief to the common man.
For the provision of essential commodities (i.e. wheat flour, sugar, ghee/oil and pulses) on subsidised rates, the USC was allocated Rs17 billion in FY2023 which also includes Rs5 billion for Ramzan Relief Package.
Subsequently, an additional amount of Rs17.4 billion was allocated to the USC including Rs540 million for the provision of essential commodities in flood-affected areas through the USC. The allocation of BISP Welfare schemes is extended from Rs360 billion to Rs400 billion. Under BISP Kafaalat Program, Rs9,000 is being paid to eligible beneficiaries, wef, April 2023.
While quoting a report of the Food and Agriculture Organization (FAO) of the United Nations, it said Pakistan has been facing a severe crisis in the agriculture sector, known as the 5 F’s crisis, which includes food, fuel, fertiliser, feed, and finance.
The weakening of exchange rate, global commodity price surges, reduced domestic subsidies, and flood-related disruptions have significantly reduced the purchasing power of low-income households, threatening poverty and food security gains achieved in the last decade. Inflation has risen from 13.4 per cent in April 2022 to 36.4 per cent in April 2023, with food inflation even higher, reaching 46.8 per cent in urban and 52.2 per cent in rural areas.
Food prices in Pakistan have rapidly increased in the second half of 2022 with wheat flour prices increased by 106.7 per cent, chicken prices by 43.1 per cent, pulse gram prices by 48.4 per cent, rice by 87.9 per cent, milk by 36.4 per cent and cooking oil by 34.7 per cent in April 2023 as compared to a year ago.
Pakistan’s reliance on imported commodities, such as edible oil, tea, pulses, wheat, and other agricultural inputs has increased due to a shortage of domestic production. The rise in international prices of commodities has exacerbated the trade deficit.
The food imports increased to USD eight billion with food exports remaining at USD 5.4 billion in 2022. The current financial crisis in the country has made it challenging to import essential food commodities and inputs.
The country is importing around 10 per cent of its wheat requirement mainly from Russia and Ukraine, which has contributed to an increase in domestic prices and high support prices for wheat for the 2022-23 seasons.
High fuel prices have led to higher production and transportation cost, making food more expensive, while the high cost of fertiliser has made it difficult for farmers to afford essential inputs.
The poultry industry is also facing a crisis due to high import costs and restrictions on the import of soybean. Although the international prices of agriculture-related commodities have started to decrease in the third quarter of 2022, however, Pakistan’s currency depreciation and high fuel prices have prevented the impact reflected in the domestic markets.
Resolving the 5F crisis requires not only the stabilisation of international prices but also the implementation of supportive policies and measures that can address domestic factors, which are driving up inflation.
The headline inflation, measured by the growth in CPI was recorded at 28.2 per cent during July-April FY2023 as against 11.0 per cent during the same period last year. The increase in inflation was broad-based with all categories recording higher inflation except for communication services.
Across product categories, inflation for transportation, given its direct link to fuel prices, registered a sharp increase of 52.8 per cent as against 19.4 per cent during July-April FY2022. Similarly, housing, water, electricity, gas and other fuel have recorded an increase of 13.6 per cent as against 11.0 per cent during the same period last year.
The increase in domestic energy prices was attributed to rising global oil prices, exchange rate depreciation and adjustment in energy tariffs/petroleum levy. Perishable food items are the main contributory factor in jacking up food inflation. Inflation in perishable food items increased by 47.0 per cent as compared to 4.1 per cent during the same period last year.
A major increase is witnessed in the prices of potatoes, onions, and fresh vegetables. Production of tomatoes and onion suffered due to flooding in Sindh and Balochistan. Duty-free imports of onion and tomatoes were allowed to ensure there is no shortage of the commodities in the market.
Non-perishable food items recorded a 36.4 per cent increase during July-April FY2023 against an increase of 13.1 per cent during the same period last year. Item-wise data reveals that upward pressure came from wheat flour, rice, chicken, eggs, edible oil/ghee and pulses.
In Q1-FY2023, CPI national showed an exorbitant increase of 25.1 per cent compared to 8.6 per cent in the corresponding quarter last year. This was on account of the higher pace of inflation in perishable items. The same is the case with nonperishable food items. The food inflation is primarily due to the impact of catastrophic floods, higher global food and fuel prices and currency depreciation.
Similarly, in Q2 and Q3-FY2023, major groups such as food, transport, health, recreation and culture experienced double-digit inflation which jack up the overall national CPI. The price increase was broad-based except for communications as all categories of goods and services recorded double-digit inflation during the current fiscal year.
CPI inflation-Urban increased by 33.5 per cent on YoY basis in April 2023 as compared to an increase of 33.0 per cent in the previous month and 12.2 per cent in April 2022. The Urban Food and Non-Food inflation recorded at 46.8 per cent and 24.9 per cent, respectively, as compared to 15.6 per cent and 10.2 per cent in the same month last year. During the period July-April FY2023, CPI-Urban recorded at 25.9 per cent as against 10.9 per cent during the same period last year.
On YoY basis, the food commodities that contributed to urban food inflation during April 2023 over the same month of last year include cigarettes (159.9 per cent) followed by tea (108.8 per cent), wheat flour (106.7 per cent), wheat (103.5 per cent), eggs (100.9 per cent), rice (87.9 per cent), potatoes (76.9 per cent), moong (57.2 per cent), maash (56.4 per cent), gram whole (55.6 per cent), onions (51.9 per cent), besan (51.2 per cent), dry fruits (49.1 per cent), pulse gram (48.4 per cent), beans (47.5 per cent), chicken (43.1 per cent), bakery and confectionary (42.5 per cent), and sugar (42.1 per cent).
The food commodity that witnessed decline in price is tomatoes (47.6 per cent). The non-food commodities that witnessed an increase in prices include text books (106.8 per cent) followed by stationery (83.7 per cent), motor fuel (75.4 per cent), gas charges (62.8 per cent), washing soap/detergents/match box (60.4 per cent), personal effects (44.8 per cent), motor vehicle accessories (42.6 per cent), motor vehicles (41.5 per cent), household equipment (40.9 per cent), construction input items (37.2 per cent), marriage hall charges (32.9 per cent), solid fuel (31.9 per cent), personal grooming services (31.9 per cent), cotton cloth (31.5 per cent), electricity charges (30.8 per cent), plastic products (30.6 per cent), transport services (28.8 per cent), mechanical services (25.0 per cent), cleaning and laundering (24.3 per cent), doctor (MBBS) clinic fee (21.6 per cent), and tailoring (21.2 per cent).
CPI inflation-Rural increased by 40.7 per cent on a YoY basis in April 2023 as compared to an increase of 38.9 per cent in the previous month and 15.1 per cent in April 2022. Food and non-food inflation recorded at 52.2 per cent and 29.9 per cent as compared to 17.7 per cent and 12.8 per cent, respectively, in the same month last year. During the period July-April FY2023, CPI-Rural recorded at 31.6 per cent as against 11.2 per cent during the same period last year.
The Rural-Urban inflation differential may be attributed to relatively loose price checks in rural areas as well as higher weight of food basket which are the major contributor in jacking up overall inflation. In rural YoY inflation, the food commodities that contributed to upward growth of CPI include cigarettes (137.7 per cent), wheat flour (104.2 per cent), tea (100.3 per cent), wheat (95.3 per cent), eggs (95.2 per cent), potatoes (82.3 per cent), rice (81.9 per cent), maash (64.9 per cent), moong (63.0 per cent), onions (55.6 per cent), besan (55.4 per cent), gram whole (55.1 per cent), fresh fruits (55.1 per cent), pulse gram (50.7 per cent), chicken (48.6 per cent), sugar (41.1 per cent), milk fresh (40.3 per cent), beans (38.4 per cent), beverages (35.9 per cent), and mustard oil (33.9 per cent).
The food commodity that witnessed a decline in price is tomatoes (57.1 per cent). The non-food commodities that contributed to rural inflation include textbooks (126.9 per cent), motor fuels (80.5 per cent), personal effects (53.6 per cent), washing soaps, detergents and matchbox (51.2 per cent), stationery (48.1 per cent), motor vehicles accessories (43.6 per cent) transport services (39.3 per cent), household equipment (37.3 per cent), major tools and equipment (36.9 per cent), construction input items (33.1 per cent), marriage hall charges (32.0 per cent) and electricity charges (30.8 per cent). Core inflation is defined as non-food and non-energy (NFNE) inflation which is calculated by excluding the food group and energy items (kerosene oil, petrol, diesel, CNG, electricity, and natural gas) from the CPI basket. Core inflation has steadily risen since October 2021 in both rural and urban areas.
The rise in core inflation was partly due to the depreciation of the exchange rate and rising production cost of core goods including durable goods.
Core inflation for urban and rural recorded at 15.6 per cent and 19.4 per cent, respectively, during July-April FY2023 as compared to 7.6 per cent and 8.3 per cent during the same period last year. The YoY core inflation remained higher in both Urban and Rural as compared to the same months last year.
Sensitive Price Indicator (SPI)
The annualized increase in SPI during July-April FY2023 was recorded at 31.7 per cent against 16.9 per cent in the same period last year. Twenty-four major food items including wheat, wheat flour, rice, tomatoes, onions, masoor, moong, maash, chicken, sugar, red chilies, etc having a weight of 57 per cent influenced SPI by (+) 28.2 per cent.
Copyright Business Recorder, 2023