Inflation is pushing an ever increasing number below the poverty line (currently estimated at 40 percent comparable to Sub-Sahara Africa) and the critical question that should, not likely to be, but should be uppermost in the minds of the formulators and approvers of the budget 2024-25, is to determine anti-inflationary measures that no donor – multilateral or bilateral – will challenge and proceed to implement these measures faithfully.
The two key words are measures that would be supported by the donors, particularly the international Monetary Fund (IMF) given that negotiations for the next programme are underway; and faithful implementation of these measures as our administrations, barring none, typically overstate the budget allocation for development and by year end have ruthlessly slashed it to bring some semblance of sustainability to the budget deficit which, by itself, is a highly inflationary policy – a practice that is sourced to resistance to curtail current expenditure that reflects elite capture of the country’s scarce resources.
Inflation (Consumer Price Index) in double digits has been a feature of the Pakistan economy since May 2022 – peaking at a high of 38 percent in May last year and as per the Pakistan Bureau of Statistics (PBS) declining each month since January 2024 – from 28.3 percent to 23.1 percent in February, to 20.7 percent in March to 17.3 percent in April to 11.8 percent in May.
The average July-May 2024 is a high of 24.52 percent against 29.16 percent in the comparable period of the year before – rates that are simply not sustainable for the common man.
The decline in CPI, which includes imported inflation, surpassed core inflation (non-food and non-energy) for the first time in May 2024 registering 12.3 percent (0.5 percentage points higher) which has raised red flags amongst independent economists for three reasons: (i) the CPI is clearly understated as it does not take account of the average electricity tariffs but the subsidised rate applicable for those who use less than 200 units per month and the rate of essentials is the notified subsidised rate available at Utility Stores though in many instances the item is either unavailable or of poor quality; what these doctored figures reveal is a lack of understanding by the stakeholders that understating inflation is not going to generate a feel good factor as millions of consumers are fully cognizant of the erosion of their rupee value as and when they go to the market; (ii) the weightage given to some items requires a re-evaluation as it is not reflective of the expenditures of lower income levels for example rent’s weightage is 19.255 with an index of 162.5 in April and May 2024 while electricity’s weightage was 4.55 and gas 1.08; and (iii) a core inflation lower than CPI indicates that last month domestic factors fuelled inflation at a faster pace than international factors in spite of the two ongoing conflicts – Israel-Palestine and Russia-Ukraine – that is effecting the prices of oil and products as well as grain.
The unsustainability of high inflation for the poor is exacerbated by two factors. First, there have been closures of private sector units due to the prevailing economic impasse and hence wages have stagnated as unemployment rate has risen to more than 10 percent, according to some independent economists.
True that most administrations raise the minimum wage every year; however, this rate is paid by registered companies and not by a larger number of units that are outside the legal economy.
And disturbingly a raise in salaries is limited to those who draw salaries at the taxpayers’ expense, estimated at only 7 percent of the entire labour force.
Donors will endorse what they consider are three major anti-inflationary tools being implemented since 2019. First, a high discount rate (22 percent at present) that as per donors reflects a positive real rate of return.
While the Monetary Policy Committee (MPC) under the chairmanship of the Governor State Bank of Pakistan will meet today to determine the rate it is unlikely that domestic instead of IMF pressure would be allowed to prevail and, at best, the adjustment would be minor – an adjustment that will have no appreciable effect on either raising the credit to the private sector (constantly declining since 2019) or reduce the outlay on the budgeted debt servicing.
Second, there will be no reprieve to the electricity/gas consumers of this country as donors are likely to continue to insist on full cost recovery that government after government has passed onto the general public rather than seek to disentangle the sector from previous severely flawed decisions that include agreeing to contracts that allow for capacity payments and repatriation of profits, approving construction of coal-fired plants away from the source of coal, supporting solar panels that have upped the capacity payments, transmission networks unable to vacate the generation capacity and of course theft.
And finally, the donors are not likely to agree to any reduction in the ambitious target revenue for next year, which again will be passed onto the general public given the high reliance on indirect taxes (to the tune of 70 to 75 percent of total collections) whose incidence on the poor is greater than on the rich though lip service by both the donors and the administration to widen the net will persist.
Organised resistance to these measures by the target elite groups have made a mockery of attempts to widen the net so far.
So what are the measures that the government can take to reduce inflation and which will be supported by the donors? Cutting current expenditure, which would require sacrifice by those who get paid at the taxpayers’ expense – not only in terms of a wage freeze but also in terms of deferment of all procurement for next year.
To conclude, the budget for next year must seek to not sustain current expenditure at the ridiculously high budgeted 13.32 trillion rupees in the outgoing year but actually be reduced to 11.32 trillion rupees that would create fiscal space as well as leverage for the government to negotiate better on behalf of the general public.
Copyright Business Recorder, 2024
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