Inflation has reached politically untenable levels in the ongoing year, considerably higher than the high rates prevailing in previous years that were the cause of serious concern to the Khan administration as evidenced from the then Prime Minister’s public acknowledgement that inflation has reached levels that “keeps him up at night.”
The four different inflation measurements are as follows: Consumer Price Index (CPI) measures prices of 487 items collected from 40 cities and 76 markets and includes the prices of imported items which are a function of international prices as well as the rupee dollar parity; in a major departure from previous practice former Governor State Bank of Pakistan Reza Baqir pegged the CPI to the discount rate; (ii) core inflation is non-food and non-energy, a measure of prices of domestically produced items and therefore pegged to the discount rate; (iii) sensitive price index refers to price movement of essential items from one week to the next; and (iv) wholesale price index indicates the price in the wholesale market.
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2018-19 2019-20 2020-21 2021-22 November 2023
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Consumer price index (national) 6.80 10.74 8.90 12.5 23.8
(October 25.49)
Core inflation (June) 6.5 5.4 11.5 14.6 (October 14.9)
Sensitive price index 13.83 13.74 5.11 17.10 28.30 (October 28.63)
Wholesale price index 15.98 10.24 9.41 24.91 35.59 (October 37.72)
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Source: Pakistan Bureau of Statistics
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Four observations are in order. First, the rise in CPI, SPI and WPI in October and November 2022 compared to 2021-22 has been more than 10 percent, barring core inflation.
The question is whether the rise can be attributed to the unfunded relief package announced by the Khan administration on 28 February this year even though his government implemented it for nearly five weeks while the incumbent government implemented it for another seven weeks – a delay that almost certainly accounted for even harsher upfront conditions in the International Monetary Fund’s (IMF’s) seventh/eighth reviews (dated 16 August 2022) relative to the sixth review.
The reversal of the relief package was completed in two phases - 28 May and 3 June - but significantly in the finance bill 2022 the government raised the petroleum levy limit from 30 rupees per litre to 50 rupees per litre while budgeting a whopping 750 billion rupees under this head.
And while there was foot dragging in the first few months with respect to reliance on this easy to collect revenue source as the international fuel prices had sky rocketed due to the Russia-Ukraine war yet in recent weeks the price has come down and the Finance Ministry is once again looking at this regressive and highly inflationary tax as an easy source of revenue. Thus while the levy was raised to the maximum limit on petrol in the previous notification yet effective 1 December the government also raised the levy on high speed diesel from 12.5 rupees per litre to 25 rupees per litre.
Second, the disparity between the interbank rupee dollar parity and the open market rate has widened considerably with the former registering 224.75 (offer) while the latter’s offer was 231.5 on Thursday with credible reports indicating that actually procuring the dollar at the rate cited in the open market is next to impossible. Critics are quick to accuse Finance Minister Ishaq Dar who has a history of exchange rate manipulation yet one would hope that this is not the case - a view that is strengthened by State Bank of Pakistan’s (SBP’s) autonomy granted by parliament in January 2022 that paved the way for the success of IMF’s sixth review.
Be that as it may, administrative and exchange restrictions are continuing (also noted in the seventh/eight IMF review documents) but there is a need for SBP to acknowledge that merely raising the discount rate by one percent is unlikely to contain inflation and if the government is ready to take politically challenging decisions as it claims ad nauseum then it needs to lift these restrictions which would raise inflation (most definitely by a good ten percentage points higher than what is prevalent today) but would come under control within the next seven to eight months if accompanied by (i) a dramatic reduction in current expenditure which was budgeted at a whopping 8.69 trillion rupees with a reliance of 40 billion dollars on borrowing from abroad and (ii) shifting from regressive taxes to progressive taxes (again a politically challenging decision).
Third, core inflation did not rise by as much as the other three indicators. This may be attributed to the fact that core inflation does not take account of the major import items in the country and therefore the rupee-dollar parity is of little significance.
However, the rise in fuel prices does impact on domestic prices (farm to market transport of goods) as does the rise in electricity tariffs yet core inflation also reflects administrative failures.
In this context it is relevant to note that the national price monitoring committee used to meet weekly under the chairmanship of the Minister of Finance, with provincial secretaries present, but has held two meetings under the chairmanship of the Minister of Planning Ahsan Iqbal – on 24 August and then again on 16 September. However, the Planning Minister has little power to change the structure of the existing taxes that remain unfair and inequitable and his helplessness in the face of rising prices was evident from his statement during the 16 September meeting: “the results are not seen on the ground. After the decline in palm oil prices the results should be seen.”
And finally, data suggests that inflation has come down on all counts in November 2022 compared to the month before – CPI by 1.69 percentage points, core by 0.3, SPI by 0.33 and WPI by 2.13 percent. Many households dismiss this as data manipulation as has been evident in the past but what is relevant to note is that this is the rate of increase and all the four inflation indicators remain alarmingly high.
Copyright Business Recorder, 2022
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