All hail SBP, for inflation has witnessed its third consecutive month of slowdown, after peaking at 38 percent in May 2023. Yet, while the headline number may no longer be spiraling out of control (a big if), it has also fallen dead in its tracks. Since the dramatic fall of 10 percentage points in June 2023, monthly number has proved surprisingly stubborn, falling by just two percentage points in as many months. At this rate, average inflation may struggle to decline to 20 percent for full year FY24 – the fiscal target set by the outgoing government –raising serious suspicions on the central bank’s claim on maintaining positive real rates on forward looking basis.
To understand how broken the inflation situation is, look no further than the food basket. Since the floods and IMF-led austerity measures hit the economy together during monsoon 2022, it has been 12 consecutive months of headline CPI clocking in above 25 percent, and as many months of food prices contributing at least half – or 50 percent of the increase in the consumption basket.
The apparent correlation between high rate of inflation and the higher weighted contribution by the food commodity basket is often used as evidence to insist that the monetary policy transmission in Pakistan’s economy is broken. That high inflation in Pakistan is a direct result of supply-side distortions in the value chain. And consequently, that any more measures to contract or tighten the screws on monetary bases would not fix this problem that is uniquely created by supply-side distortions and may in fact exacerbate the problem.
At the risk of resorting to cliches, the correlation is grossly being misunderstood for causation. Pakistan is no longer standing at the precipice of a food catastrophe, at least not one caused by exogenous shocks or supply-side forces. Unlike last year, Pakistan is neither in the throes of a climate-led catastrophe, nor is a global conflicting wreaking havoc with world food supply chains. World Bank’s Food Commodity Index is at its lowest level in 18 months – below pre-Ukraine invasion levels – and has fallen 20 percent since its peak in June 2022.In fact, while the most devastating impact from the floods was witnessed in the value chain for perishables, the perishable index has fallen below pre-monsoon 2022 levels! Yes, in Rupee terms.
That last bit bears particular emphasis. That higher prices of energy, utilities, power and fuel cascade into higher food prices is almost treated as a gospel truth by most commentators on Pakistan’s economy. Yet, even as fuel prices have scored tripled century and extractive power billing has forced traders to call for strike, perishable prices are at their 13-month low. Do higher transportation prices not translate into higher costs for growers, arthis, and retailers of perishables?
The answer, as this space has pointed out many times now, lies in the complete loss of investor confidence in Pakistan’s currency. While perishable index flirts with nostalgia, non-perishables prices charts scary heights, with the index rising 43 percent in Aug 2023 (over same month last year). Compare this to 27 percent headline CPI, and just 12 percent rise in perishables over last year. Food basket may very well be responsible for over half of the headline CPI numbers, but non-perishables are responsible for nearly all of it! That is, up to 96 percent of food inflation during Aug 2023 was due to non-perishables alone.
Which brings us to the statement of obvious. It cannot be that higher fuel cost, or tube well power charges only affect cost of production of wheat and rice but not of tomatoes and onions. And so far as smuggling is concerned, both are transportable, at least so far as Pakistan’s land routes up to Central Asian countries go. The only thing that sets apart non-perishables such as grains, cereals, pulses, tea, sugar from perishables is storability and standardization, which has turned them into a perfect store of value in a country where local currency is fast approaching a time when it is no longer worth the paper it is printed on.
What does this mean? That in a country starved of dollars and other legal avenues of protecting purchasing power of savings, investors are now neck deep in building up inventory of food grains, allowing them to maintain value even as local prices lose all semblance of normalcy. And the more localized a commodity (due to barriers on import), the higher the incentive to hoard and outward smuggle. Meaning, local prices of wheat, sugar are not just increasing on a daily basis to adjust to dollar parity, they may be even higher because import restrictions create an artificial deficit. As a test case, consider the diverging trends even within non-perishable basket: while local currency prices of wheat, rice and sugar have increased more than the dollar, prices of import-based commodities such as vegetable ghee, pulses, lentils and tea do not fully reflect the delta due to currency depreciation. Why? Maybe because the currency arbitrage on outward smuggling of import-based commodity is too underwhelming to make up for the financial risk.
What does this imply for food security? Let the currency slide continue – along with barriers on import of grains and cereals –and the country will fast deteriorate to the situation where policymakers shall be left wondering if there are enough carbs to fill the stomachs, let alone worry about protein security due to the crisis in poultry industry or the rise in milk prices.
Fix the currency. Restore confidence in the value of Rupee.And if that’s a challenge is above your paygrade (it probably is), at least remove controls from trade so that artificial deficit are no longer mouth watering for the unscrupulous. (You could also man the borders more honestly, but once again – that may be too much to ask).
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