EDITORIAL: The cut in petrol and diesel prices for the fifth consecutive fortnight – amounting to total reduction of Rs28.57 and Rs36.34 respectively – bolsters the official argument that the economy is being “nursed back to health”, especially since inflation also beat all forecasts and clocked in at a 44-month low of 6.9 percent in September.
Yet, despite the numbers, the finance minister seems to understand basic economic price theory, that prices are flexible upwards but generally very sticky downwards and a decline in petroleum prices is rarely reflected in fares or even prices of essential commodities.
That explains why, despite the welcome dip in inflation, he’s “urged” provincial governments to “take an active role in this matter through price monitoring committees to help reduce transport fares and the prices of other goods”. These are times when the most unscrupulous elements of the economic chain exploit price distortions and make their big killings, after all, so vigilance will be essential to keep the gains from being lost so early in the transition to economic revival.
Besides, there’s no better proof than what’s happening in the Middle East this week to prove how erratic oil prices can be in times of uncertainty. Oil has been dropping from months on fears of a hard landing in the US and demand destruction in China once its shadow banking system imploded, yet the Iran-Israel escalation rewrote the script in an instant, rattling financial markets with safe haven inflows into the dollar, gold and US Treasuries and, of course, risk premium returning to the oil market with talk of possible supply disruptions once again snatching the headlines.
Iran vowed retaliation, and delivered, making it Israel’s turn as this tit-for-tat tragedy unfolds in the Gulf. If things continue to spiral, the five straight fortnights of petrol price cuts would run into a brick wall because of completely exogenous factors and put a dent in the recovery the government is trumpeting so loudly. That would indeed be a shame, because the feel-good factor from dropping petrol prices hasn’t yet completely reached the people; hence the finance minister’s gentle reminder to provinces about the effectiveness of price monitoring committees.
Regardless of how events beyond the government’s control roll out, though, it is appreciated that the State Bank’s hawkish stance for the longest time delivered the results it expected, despite the widespread concern about suppressing aggregate demand to manage cost-push inflation. Now there is growing optimism about more interest rate cuts down the road and, if energy prices can be rationalised, there should be welcome upside to growth now that the EFF (Extended Fund Facility) is also in the bag.
But that’s hardly the whole story. Another big problem is just around the corner. Nobody in the government is saying this out loud right now, for obvious reasons, but the IMF programme will also bring tax hikes which will inflate bills and take us back to the days of cost-push inflation.
This deserves serious attention, and the people should be told if the drop in inflation is really a temporary lull. And if it is a short-term victory before we are forced to submit to the (cost-push) inflationary pressures of the tax-heavy structural adjustment of the EFF, then how long do people and businesses really have to consolidate before they must ration their resources once again?
The government is justified in concentrating on the “recovery” for the moment, even though monetary policy is the domain of the supposedly independent central bank. But it must not give people false hope, especially after they have endured years of record inflation and unemployment that left behind a marked qualitative destruction of their standard of living.
Copyright Business Recorder, 2024
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