EDITORIAL: Advisor to the Prime Minister on Finance Shaukat Tarin while chairing the weekly National Price Monitoring Committee (NPMC) observed that the rates of lentils are high because lentils are imported, implying thereby that Pakistan is in the throes of mainly imported inflation. While price control is a provincial subject yet there is no doubt that the contribution of basic essential imported items (including petrol and products, cooking oil and lentils) to domestic inflation can be sourced to external factors as a post-pandemic world struggles to cope with supply side issues that, together with high post-lockdown demand, is driving up prices. It is therefore important to note that domestic factors as well as policy decisions are also at play.
One factor that has been highlighted by the Prime Minister as well as Cabinet members and forms an integral part of the Khan administration’s narrative is the prevalence of the “mafia” defined as those operating in manufacturing/wholesale/retail markets of domestically produced as well as imported items who routinely jack up prices to earn windfall profits.
In this context, it is relevant to note that in Pakistan even in those commodities where a large number of buyers and sellers exist; for example, vegetables, cement, etc., the capacity of the sellers to influence prices through collusion has remained largely unchallenged in spite of sporadic action by the Competition Commission of Pakistan (CCP).
In marked contrast, however, in other countries these items operate in perfect competition market conditions where no seller or buyer can influence prices while collusion is a justiciable offence. One solution must be to strengthen the hands of the CCP and proactively seek to vacate stay orders that are easily obtained by the offending parties. Another would be to ensure that administrative measures are vigorously implemented, which also remains a challenge.
The continuous erosion of the rupee-dollar parity is also a factor in the rise in prices of imported items, which has not been arrested subsequent to a 100 basis points rise in the discount rate on 14 December. In addition, the fiscal policy of the government envisages levy on imported items with, for example, the petroleum levy (PL) to rise by 4 rupees per litre each month (though this month the rise is nearly double given that the government has not passed on the entire decline in its international price) till it reaches the limit allowed by law to 30 rupees per litre as agreed with the International Monetary Fund under the recently concluded sixth review.
The irony is that if the government does not raise its revenue collected by the Federal Board of Revenue (which persists in tapping low hanging fruit rather than making structural changes that would raise reliance on ability to pay principal rather than on sales tax whose incidence on the poor is greater than on the rich) then the budget deficit would widen further, which is a highly inflationary policy.
Perhaps the single most indefensible action that has contributed to inflation has been to raise the budgeted current expenditure for 2021-22 to 7.5 trillion rupees against the 6.26 trillion rupees spent last fiscal year – a rise that envisages total non-bank borrowing of 1.2 trillion rupees (against 209 billion rupees last year) and net external receipts of 1.24 trillion rupees this year against 223 billion rupees last fiscal year.
To lay the blame on the rise in pensions is not appropriate as they have risen from 440 billion rupees last year to 448 billion rupees in the current year (with the appropriate identified reforms last year remaining pending) and defence outlay has risen from 1.316 trillion rupees to 1.370 trillion rupees in the current year.
The blame therefore has to be attributed to government borrowing as well as subsidies – from 425 billion rupees last year to the budgeted 682 billion rupees this year – money that is being used to contain inflation for the vulnerable - a policy that is inexplicable as it is fuelling general prices on the one hand by raising the budget deficit that has been unsustainable for the past three years while at the same time remaining a source of corruption through misuse.
There are further concerns that a projected rise in interest rates in the US, the rupee may get another beating through a decline in portfolio investment as well as the passage of the money bill that has been prepared as a prior condition of the Fund will have a non-salutary impact on the general price level. A quick result in staying the price level at its current level would be if the government decides to seek major sacrifice from all recipients of current expenditure and reduces its own penchant for borrowing, instead of asking people to pray that international prices come down.
Copyright Business Recorder, 2021
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