EDITORIAL: Pakistan Bureau of Statistics (PBS) calculated the August Consumer Price Index (CPI) at 9.6 percent – a 1.5 percent decline from the July figure of 11.1 percent. Core inflation (non-food and non-energy) declined to 10.2 percent in August from the July rate of 11.7 percent – perfectly matching the decline in CPI.
And it is noteworthy that since May 2024 a new phenomenon was evident in the calculation of CPI and core inflation: the variation in the rate of CPI and core inflation narrowed less than a percentage point implying that imported inflation was minimal and the pressure was mainly from domestic inflation.
While economists maintain that inflation is understated by at least 3 to 4 percentage points partly due to the weightage given to markets in rural areas as opposed to metropolitan centres and partly due to deliberate manipulation in using the price at Utility Stores (subsidised) where many essential items are out of stock or not fit for human consumption in the case of wheat and in some instances no synchronicity of complementary items on sale. Be that as it may, the data suggests a downward trajectory in terms of CPI and core inflation.
Imported inflation is a function of the rupee-dollar parity, which remained remarkably constant and explains why CPI is on a downward trajectory; however, what constitute a source of concern are two associated factors, which appear not to have been taken into account with respect to the CPI: (i) taxes were raised significantly in the current year’s budget, particularly on the salaried class as well as sales tax and total taxes were budgeted to rise by 40 percent in comparison to the revised estimates last year – from 9,252 billion rupees to 12,970 billion rupees.
This necessarily implies a significant decline in householders’ income, which implies scaling down purchases or a decrease in aggregate demand. This indicates a decline in the quality of life of those in jobs and explains the rise in poverty levels to 41 percent last year; and (ii) reserves were 9.2 billion dollars on 16 August 2024; however, the government was short of 2 billion dollars of what it budgeted from external sources and is proactively seeking pledges to secure this amount while it is also in the market for 4 billion dollar foreign commercial bank loans, which have a high rate of interest and a low amortization period – factors that would raise the debt servicing cost with a commensurate negative impact on fiscal deficit that is a highly inflationary policy.
Core inflation has been on the decline and this puts pressure on the State Bank of Pakistan to revisit the existing high discount rate of 19.5 percent – 9.9 percent higher than CPI (SBP during Reza Baqir’s tenure as its governor pegged the discount rate to CPI) and 9.3 percent higher than core inflation (pegged to the discount rate by all other governors).
The question is whether any reduction in the discount rate on the next scheduled Monetary Policy Committee meeting on 12 September will be approved by the International Monetary Fund (IMF) team, given that the loan approval by the Fund Board remains pending that indicates that all agreed prior conditions reached when the staff-level agreement was announced on 12 July 2024 have yet to be met by the authorities; and at best, a high discount rate could well be one of them or, at worst, it could become yet another prior condition before Board approval, a prerequisite for tranche release.
A decline in inflation when the value of each rupee earned is not only contracting because of inflation but the actual take-home pay is also shrinking because of higher taxes, the level of discontent amongst the general public is not going to abate.
What is required for the authorities is to create greater leverage with the Fund through reducing their own current expenditure, extend subsidies to only the beneficiaries of the Benazir Income Support Programme for better targeting and not rely on higher taxes from a beleaguered public unable to bear that burden.
Copyright Business Recorder, 2024
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