Country facing stagflation?

The Consumer Price Index (CPI) registered at 12.63 percent in December 2019, against 12.7 percent in November; however what is baffling is that contrary to the general perception that urban inflation is higher than rural inflation the Pakistan Bureau of Statistics (PBS) has calculated the former at 12.1 percent when compared to November while rural CPI is 13.6 percent. Additionally, the CPI general inflation rose by 12.6 percent year-on-year basis in December 2019 compared to the comparable period of the year before with urban CPI rising by 12 percent and rural by 13.6 percent.

What is also baffling is that the PBS reveals a decline in indices for food and non-alcoholic beverages, nonperishable and perishable food items in December 2019 compared to the previous month (clothing and footwear registering a slight rise) with the highest increase in transport (from 143.6 to 145.01), communication (from 107.98 to 108.18), health (136.36 to 137.10) and furnishing and household equipment maintenance (from 125.7 to 126.59) - items that are higher priced in urban centers. Be that as it may, transport sourced inflation is attributed to the steady increase in the price of petroleum and products (rationalized as a pass through due to the rise in the international price of oil and products) but this does not take into account the under-valued rupee to the tune of around 5 percent as per data uploaded on the State Bank of Pakistan (SBP) website for October (November figures are still awaited).

Core inflation measured by non-food non-energy CPI increased by 7.6 percent on year-on-year basis in December 2019 as compared to an increase of 7.5 percent in the previous month and 7.8 percent in December 2018. Core inflation is normally used as a yardstick to determine the discount rate which is usually higher by 2 to 3 percentage points. However, the discount rate remains unchanged at 13.25 percent since July or, given the recent core inflation rate, higher by a whopping 5.45 percentage points. The prohibitively high discount rate is throttling productivity in the country though it has attracted hot money that economists no longer define as a desired source of inflows.

The first quarterly report of the International Monetary Fund (IMF) notes that "the pass through from the rupee depreciation has, so far, been more contained than expected. Headline inflation stood at 12.3 percent year on year in November while core inflation was 8.1 percent. The SBP has kept the policy rate at 13.25 percent since July 2019." The Fund's conclusion appears to attribute lower inflation to SBP high policy rate though in Pakistan the linkage between the discount rate and inflation is tenuous at best as inflation, specifically food inflation, is more a function of input costs including electricity, water rates and fertilizers which are rising, while transport costs as aforementioned are being negatively impacted by an under-valued rupee.

There is no doubt that failing an improvement in governance in the utilities sector the full cost recovery objective set by the IMF is being met almost entirely through a raise in tariffs - the same policy thrust that was implemented during previous administrations on an IMF programme. Thus with input costs rising across the board, utilities as well as capital costs, it is little wonder that Pakistan is facing stagflation - with inflation rising, production shrinking and unemployment rising. One would hope that the government takes serious cognizance of this disturbing situation or else, as the situation worsens, face the very real prospect of socioeconomic unrest.