Inflation is a politically sensitive indicator, calculated by the Pakistan Bureau of Statistics (PBS), which has prompted routine challenge by members of the opposition as well as independent economists voicing concerns over data integrity – a view endorsed by the International Monetary Fund (IMF) in its 10 October 2024 loan approval documents subsequent to formal Board approval of the 7 billion-dollar Extended Fund Facility (EFF) programme.
Under the section titled Policy Discussions, the Fund noted “major shortcomings” that “remain in the source data available for sectors accounting for around a third of Gross Domestic Product… (and emphasized) issues with the granularity and reliability of the Government Finance Statistics (GFS)” – an observation that accounted for the Fund extending a technical assistance (TA) designed to improve GFS, including formulating a new Producer Price index (PPI).
The conditions agreed between the Fund and the government contained in the Memorandum of Economic and Financial Policies, note that the TA would assist the authorities to “review current data sources and compilation processes and provide guidance on how to improve fiscal reporting in accordance with international standards (as detailed in GSM 2014).”
GSM 2014 is a voluminous 450-page document prepared by Fund staff - the third edition of this Manual - which “describes a specialized macroeconomic statistical framework, GFS framework, designed to support fiscal analysis. The Manual (i) provides the economic and statistical reporting principles to be used in compiling the statistics; (ii) describes guidelines for presenting fiscal statistics within an analytic framework that includes appropriate balancing items; and (iii) is harmonized with other macroeconomic statistical guidelines.”
So how is PPI defined in GSM 2014? Assumptions relating to market-based economies were applied, notably that “prices are economically significant when the producers are private corporations.
When there is public control, however, the unit’s prices may be modified for public policy purposes. This may cause difficulties in determining whether the prices charged are economically significant. Public corporations are often established to provide goods and services in larger quantities than a private corporation would provide at the same selling price.”
The question arises as to whether these were the right assumptions for Pakistan, given that market imperfections prevail in nearly all output sectors – be they state or privately owned.
The private sector (large scale manufacturing sector) undoubtedly has exerted a pervasive influence on all administrations through the establishment of producer associations/organisations - irrespective of whether the number of buyers and sellers for the commodity is too large to influence price - and registered them with the Securities and Exchange Commission of Pakistan, for example, All Pakistan Textile Mills Association, All Pakistan Sugar Mills Association, All Pakistan Cement Manufacturers Association, etc. These incentives have been largely withdrawn as part of the EFF conditions, though the Prime Minister has established committees tasked to propose extending some incentives with the Fund concurrence.
Public sector entities measure sales before tax/subsidy, which necessitates a comparison between receipts from sales and production costs of goods/services sold (also a function of the flawed contracts signed). In this context the Fund policy is to proactively support full cost recovery and this partly explains why our tariffs are higher than the regional average.
The GSM 2014 further appropriately argues that inflation cannot capture changes in the cost of living for specific individuals as official inflation measures use a fixed basket of goods and services which do not reflect an individual’s spending priorities.
In Pakistan’s case a family unit is much larger than in the West and includes different age groups including school going/university members and older/retired parents requiring medical assistance, asset price bubbles (inflation does not measure prices of assets like stocks or real estate which contribute to wealth inequality), underlying economic imbalances (a lower income householder would purchase a lower quality item – in Pakistan’s case it has been observed that perishables quality varies markedly), or the psychological impact of rising prices on consumer behaviour (constant rise in prices may impact on consumer confidence and spending behaviour in ways that is not captured by the rate of inflation - an example being unverified reports that there would be a shortage of an item in the market which may lead to panic buying).
To further undermine as well as complicate the relevance of inflation as calculated by the PBS is the parallel illegal “underground” economy in the country operating outside the official economic data estimated at 50 percent of the legal economy – an economy that severely compromises the effectiveness of the fiscal and monetary policies that are being implemented as conditions of the ongoing IMF loan.
A large cash economy, contributing to the “underground” economy, continues to operate in the country as a direct outcome of the taxation policy reforms, including taxing withdrawals from banks.
And finally, cash transactions currently dominate Pakistan’s economy which costs the tax authorities millions of rupees in lost revenue and generates idle liquidity. This realization by the government accounts for the unfurling of a comprehensive strategy to accelerate digital payments through instant payment system referred to as RAAST designed to encourage digital financial inclusion. There are two impediments to the success of this endeavour: (i) lack of education that would limit the number of users. And there is little confidence that the small budgeted allocations for education by the federal and provincial governments are adequate to deal with this concern in the medium or even long term; and (ii) it is not yet clear whether a 0.35 percent Merchant Discount Rate floor (person to merchant payment) would maintain affordability for micro and small businesses or whether they would resist this measure fearing that the government may begin to tax them on the basis of sales.
Thus, to cite inflation decline as a major achievement is unlikely to find any traction with the general public, and it would be more appropriate to focus on the poverty levels and unemployment. The World Bank in its recent report titled reclaiming Momentum towards prosperity: Pakistan’s Poverty, Equity and Resilience Assessment, marking the first comprehensive evaluation of poverty and welfare trends since early 2000s noted that these will be produced once the recently collected Household Integrated Economic Survey 2024-25 data is released though Christina Wieser, Senior Economist and one of the lead authors of the report, gave an entire list of extremely politically challenging to-do items that are not part of the IMF approved budget for 2025-26: “progress in poverty reduction is threatened by structural vulnerabilities…Reforms that expand access to quality services, protect households from shocks, and create better jobs—especially for the bottom 40 percent—are essential to break cycles of poverty and deliver durable, inclusive growth.”
Copyright Business Recorder, 2026