Inflation

EDITORIAL: Pakistan Bureau of Statistics (PBS) has tabulated a decline in the consumer price index (taking account of imported inflation) for June relative to May 2025 — 3.2 percent against 3.5 percent in May. CPI takes account of the fluctuation in the price of imported items as well as those domestically produced with the exchange rate parity playing a prominent role in the calculation of imported inflation and taxes on the calculation of domestic inflation, particularly taxes on petrol and products (inclusive of the hefty levy and the recently levied carbon tax), the prime inputs for transport of goods and services throughout the country.

The exchange rate parity has remained more or less constant for the past year, with the International Monetary Fund (IMF) continued insistence that “a more flexible exchange rate remains critical to absorb shocks and support the rebuilding of reserves”. While the differential between the interbank rate and the open market rate does conform to the stipulated IMF condition yet there are concerns within the market and the multilaterals that the government is “managing” the containment of the rupee — a view strengthened by the fact that the country’s foreign exchange reserves remain entirely debt-based given that the rollovers from friendly countries alone are 16 billion dollars while the reserves as on 20 June 2025 were 9064.5 million dollars.

The actual weightage of fuels is lumped together with other utilities, both those that rely on imported inputs and those that do not — housing, water, electricity, gas and fuels — to account for 23.63 percent weightage. However, details provided by PBS (Pakistan Bureau of Statistics) show that the weightage given to liquefied hydrocarbons, associated with crude oil and petroleum, had a low weightage of only 0.9994 while that ascribed to solid fuel notably wood, charcoal, peat, dry dung, inexplicably was given a weightage four times higher at 4.4761 in calculation of CPI. Perhaps this was one of the reasons behind the IMF’s concern noted in the 10 October 2024 Staff Report for the 2024 Article IV Consultation and Request for an Extended Arrangement Under the Extended Fund Facility: “Data provided to the Fund is broadly adequate for surveillance in most areas, but there are weaknesses in the National Accounts (NA) and Government Finance Statistics (GFS) that somewhat hamper surveillance…important shortcomings remain in the source data available for sectors accounting for around a third of GDP, while there are issues with the granularity and reliability of the GFS. The authorities are prioritising addressing these weaknesses, supported by Fund TA on the GFS and a new PPI (Producer Prices Index).”

Core inflation, non-food and non-energy, that the Monetary Policy Committee (MPC) reportedly considers when adjusting the policy rate declined to 6.8 percent in June against 7.3 percent in May and 8.2 percent in April. It is relevant to note that during the PTI administration the MPC agreed with the Fund to link it to CPI instead of core though it is unclear whether the current administration has reverted to linking it to core inflation — unclear because the rationale for policy rate adjustment is baffling given that it was 12 percent from January to 5 May when the CPI declined from 2.4 percent to 0.3 percent (April) and core inflation from 7.8 percent to 7.4 percent. It was reduced by 100 basis points on 5 May to 11 percent and CPI rose to 3.5 percent in May 2025 while core inflation declined by a mere 0.1 percentage point — to 7.3 percent in May. In this context, the Fund in the first review documents uploaded on its website advised the SBP to base rate changes on macroeconomic data to enhance its acceptability.

Inflation is expected to rise in the current year due to administrative measures agreed with the Fund, to raise utility prices to meet the objective of full-cost recovery, and adhere to severely contractionary monetary and fiscal policies; however, the Cabinet is ignoring the rising poverty levels in the country, which have reached the levels that are in evidence in Sub-Sahara Africa. The World Bank has noted 44.2 percent poverty level that requires the formulation followed by convincing the IMF of the need for anti-poverty policies and subsequently their implementation in letter and spirit.

Copyright Business Recorder, 2025