Menacing inflation

EDITORIAL: The Consumer Price Index for June 2022 rose by 21.3 percent year on year, 13.8 percent from May 2022, the Sensitive Price Index (comprising of 51 essential items that impact more on the incomes of the poor and the vulnerable) rose by 32 percent year on year for the week ending 30 June 2022, wholesale price index rose by 38.9 percent compared to 29.6 percent in May while core inflation (non-food, non-energy) rose by 11.5 percent in June against 9.7 percent in May 2022.

This massive rise in inflation was led by the rise in diesel (129.97 percent) and petrol (106.48 percent) prices as cited in the SPI which no doubt had a cascading impact on prices across the entire production process — from inputs to the end products — in the manufacturing and agricultural sectors, including the price of perishables.

While the incumbent government and the Pakistan Tehreek-e-Insaf are blaming each other’s flawed policies for the rise in inflation yet there is no doubt that external factors, particularly the ongoing Russia-Ukraine war that began on 24 February 2022 is impacting on inflation at a global level with the United Nations Department of Economic and Social Affairs Analysis noting that “global inflation is projected to increase to 6.7 percent in 2022, twice the average of 2.9 percent recorded during 2010-2020…soaring food and energy prices are having knock-on effects on the rest of the economy. Rising inflation is posing an additional challenge to inclusive recovery as it disproportionately affects low-income households that spend a much larger share of their income on food items. The decline in real incomes is particularly pronounced in developing countries, where poverty is more prevalent, wage growth remains constrained, and fiscal support measures to alleviate the impact of higher oil and food prices on the vulnerable groups more limited.”

Pakistan’s economic managers cite those countries that are experiencing record high inflation in the aftermath of the Russia-Ukraine war with May 2022 rates as follows: the US 8.5 percent, the UK 9.1 percent. Eurozone 8.6 percent and closer to home India at 7 percent, Bangladesh at 7.42 percent and Nepal 7.87 percent — all with a rate that is half that of Pakistan. Of course one can also cite those countries where monetary and fiscal policy management has been extremely poor in recent months and where the inflation rate is much higher than in Pakistan; for example, Turkey at 73 percent and Sri Lanka at 128 percent.

However, one would not be remiss in assuming that the lower rates in Pakistan compared to those in Turkey and Sri Lanka may partly be the outcome of severely contractionary monetary and fiscal policies in place today, as the country struggles to reach the seventh staff-level agreement with the International Monetary Fund (IMF) which would allow for disbursement of the next tranche (or two as noted by the Finance Minister recently) which, in turn, would enable the country to strengthen its low foreign exchange reserves (currently at less than two months of imports) through borrowing at concessional rates — be it from other multilaterals or from friendly countries. In other words, being on a Fund programme compelled the country to quickly reverse its expansionary policies, implemented in line with those that were followed almost globally to combat the pandemic.

The incumbent government unfairly lays the entire onus of high inflation on subsidies extended by the Khan administration on 28 February (implemented till April 9 when he left office while the coalition government ended these subsidies in two phases — 1 June and 15 June incorporating a period greater than from 1 March from 9 April). Be that as it may, its own contribution to inflation can be seen in the resultant budget deficit, which is highly inflationary, a rise in the budgeted expenditure of about a trillion rupees for 2022-23, failure to begin reforms of the pension system, failure to seek sacrifice from the recipients of the current expenditure, additional subsidies on food items in Utility Stores that are not targeted through the Benazir Income Support Programme, and a raise in the salaries of government employees while economic conditions do not merit a commensurate rise in the pays of private sector employees.

The contractionary policies currently in place, a discount rate of 13.75 percent (that raised capital input cost to a level double that prevalent in regional countries), a tax target closer to 7.5 trillion rupees (7 trillion rupees budgeted and the amended finance bill envisaging an additional half a trillion rupees) with non-tax revenue under the head of petroleum levy budgeted to generate 750 billion rupees (with the government raising the limit from the earlier 30 rupee per litre to 50 rupee per litre with a 10 rupee per litre levy already slapped on petroleum and products in spite of the continuing rise in the international price of oil) and rising utility prices are likely to push even more people under the poverty line in spite of the announcement of food subsidies available in Utility Stores where shortages of cooking oil and wheat are being routinely cited by the customers.

While the government does have some leverage vis-a-vis the IMF over reducing its expenditure, requiring massive sacrifice from the recipients, as well as undertaking structural reforms whereby the onus shifts from raising utility rates, or passing on the buck to the hapless consumers, to reducing inefficiencies and corruption yet there appears to be little with respect to revenue targets. One would therefore hope that the focus of the economic managers shifts from raising revenue to expenditure control and structural reforms.

Copyright Business Recorder, 2022