Core inflation outpaces CPI

According to the latest report uploaded by the International Monetary Fund titled "Regional Economic Outlook: Middle East, North Africa, Afghanistan and Pakistan," core inflation in Pakistan was lower than Consumer Price Index for the period 2000-15 by 1.6 percentage points (6.9 percent against 8.5 percent). The situation reversed during successive years when core inflation was higher than CPI. Thus in 2016, core inflation was higher than CPI by 1.5 percentage points (4.4 percent against 2.9 percent), in 2017 the difference was one percentage point (5.1 percent against 4.1 percent), in 2018 the difference was 2 percentage points (5.9 percent against 3.9 percent) and in 2019 by 0.9 percentage points (8.2 percent against 7.3 percent). For the current year, the IMF projects core inflation at 12.4 percent and CPI at 13 percent or in other words, Pakistan is moving back to the 2000-15 period when core inflation was lower than the CPI. This data is supported by the Economic Survey 2018-19 which gives core inflation at 8.1 percent average in 2018-19 while CPI is projected at 7 percent.

However, Pakistan Bureau of Statistics gave a core inflation rate of a little under 9 percent at the time that the government changed its economic team (April 20 Advisor to the Prime Minister on Finance Dr Hafeez Sheikh was appointed and 6 May 2019 Governor State Bank of Pakistan Dr Reza Baqir was appointed), and a CPI of around 11 percent. Thereafter the SBP raised the discount rate by 150 basis points within the month of the change in the economic team (a specific 'prior' condition of the IMF) and further raised it by 100 basis points in July arguing that the discount rate would henceforth be based not on core inflation, as in the past, but on CPI.

What is disturbing is that while, as per Baqir himself, the discount rate would henceforth be linked to CPI and not core inflation, the SBP proceeded to undertake policy measures that increased the CPI. This is evident from the fact that when the Governor assumed office, the rupee was already undervalued by about 3 percent and by August of this year it had been further undervalued by 7 percent. The high discount rate had a debilitating effect on manufacturing output to the point that it became difficult for the large-scale manufacturing (LSM) sector to borrow leading to a significant decline in output that continues to this day. In other words, the SBP charged with the responsibility of reducing inflationary pressures has, through its support for an undervalued rupee, may have done just the opposite.