Inflation for the current year, so projected the then finance minister Ishaq Dar in his 9 June 2023 budget speech, would be 21 percent for 2023-24 – revised upward to 24 percent by the International Monetary Fund (IMF) in its 11 January 2024 press release titled IMF Executive Board completes first review of the Stand-By Arrangement (SBA) for Pakistan.
There was no inflation projection in the revised budget to meet the prior SBA conditions agreed with the IMF, a revision that led to the staff level agreement (SLA) on 29 June 2023, with Finance Ministry officials stating that the 9 June budgeted target remained applicable as it was approved by parliament (inclusive of what is now known as an unrealistic 3.5 percent growth rate) on a query by Business Recorder.
Pakistan has been labeled a perennial borrower of the IMF (currently on the twenty-fourth programme in less than 75 years of the country’s history); therefore, it may be useful to look at the Fund’s definition of Consumer Price Index (CPI) to assess how accurately Pakistan Bureau of Statistics (PBS) calculations meet its basic criteria.
The IMF defines CPI as the cost of living of consumers determined by the price of goods and services and the share of each purchase/item in a households’ budget – factors that make it highly relevant in politics in general and an election year in particular. To measure the average consumer’s cost of living, government agencies conduct household surveys to identify a basket of commonly purchased items and track over time the cost of purchasing this basket which is expressed relative to a base year, the Fund further notes on its website.
The key question in Pakistan’s context is how often have household surveys been conducted to determine changes in the basket of commonly purchased items? Two observations are critical. First, while the PBS can change the weights of each item while calculating the rate of inflation yet the last time weights were changed was during the 2010-13 tenure of Hafeez Sheikh as finance minister when a 6 percent reduction in the weight of food reduced the CPI by half endearing him to his political masters.
Second; identifying changing consumption patterns of different income households has not been a primary objective of data collection by the PBS. An example is the cost of mobile phones, the service charges and the tax payable on these charges. In addition, the data that is gathered is not timely.
Pakistan Social and Living Standards Measurement (PSLM) monitors sustainable development goals (identified by the United Nations and defined bilaterally for each member country after consultations) with particular reference to poverty, education, health, housing, water and sanitation and monitors implementation of Poverty Reduction Strategy Paper but does not consider any change in consumption patterns.
A horrifying example of poor consumption patterns in Pakistan was highlighted in a World Bank blog dated last June which concluded that: (i) over 40 percent of Pakistan’s under five children are stunted as compared to the South Asian average of 31 percent. Stunting is most closely associated with brain development and physical growth; and (ii) stunting by wealth quintiles shows that 22 percent of under-fives of the richest group were stunted in 2018; a rate that marginally improved to 23 percent in 2013; and the rate for the poorest is higher at 57 percent in 2018 compared to 62 percent in 2013.
Household Integrated Economic Survey (HIES) was integrated with Pakistan Integrated Household Survey (PIHS) in 1998-99. The objective of (PIHS) is defined as a means to “provide household and community level data which can be used to monitor, evaluate, and assess the impact of Social Action Program (SAP). Policymakers need to know whether the poor have benefited from the program or whether increased government expenditure on the social sectors has been captured by the better off.” No specific assessment of changes in consumption patterns has been undertaken, an exercise that is increasingly required as the country is experiencing very high levels of stunting and a historically high inflation rate with anecdotal surveys revealing that households are having to allocate ever-rising income on food and away from other critical expenditures, including education and health.
The PBS has begun to measure urban and rural CPI and take an average of the two figures which has to be appreciated. However, within urban and rural areas the difference between different income groups/sectors is more stark, which is not captured in the CPI.
PBS continues to ignore the rise in the nature and frequency of challenges to inflation data by independent economists which centers around a sustained failure to rationalize/synchronize data from other government agencies.
If inflation does not accurately gauge a change in consumption patterns over time, then does the rationale that a high policy rate will dampen inflation apply? The IMF insists on such a linkage based on a theory widely applicable in the West where borrowing by households (most purchases – from houses to cars to other expensive items) is the norm. Its economic rationale is obvious: a high policy rate would lower private demand for credit and therefore the money in circulation that would reduce pressure on prices.
In Pakistan borrowing by the private sector (non-concessionary) is limited to large scale manufacturing sector with Pakistan government the single largest borrower from the banking sector that, in turn, pumps the money right back into the economy to meet its current expenditure, not backed by any increase in output. This raises the budgeted markup cost and thereby the budget deficit – a highly inflationary policy. As per SBP data, government borrowing rose from 3.7 trillion rupees for the entire 2022-23 year to 3.99 trillion rupees from 1 July to 19 January 2024 – government borrowing from the domestic banking sector rose by 185 percent from what was borrowed in the comparable period of last year. Broad money growth which had hovered around 14 percent in fiscal year 2024 surged to 17.8 percent year on year as of end December 2023, as per the Monetary Policy Statement dated 29 January 2024.
The policy rate was linked to the CPI from May 2019 to end June 2023 and has reverted back to being linked to core inflation since June 2023. PBS data notes a core inflation rate of 12.8 percent in March 2024 while the discount rate persists at 22 percent. This marked discrepancy should have led to an emergency meeting of the Monetary Policy Committee to immediately reduce the rate by least 600 to 700 basis points; however, the six-month yield of treasury bills was raised this week past leading to the conclusion that all is not well in the state of Denmark.
To conclude, if inflation is to be tackled head-on, the government must tighten its belt by (i) reducing the sustained elite capture, including freezing public sector salaries, withdrawing incentives (electricity cars, petrol etc.), reforming the unsustainable pension system to seek employee contribution and increasing direct tax collections not by disguising indirect taxes as direct taxes (withholding tax on purchases) but by widening the tax net, and (ii) impose punitive measures on any administration that violates the debt ceiling for external and domestic loans.
Copyright Business Recorder, 2024
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