EDITORIAL: Pakistan Bureau of Statistics (PBS) revealed a 4.9 percent Consumer Price Index, a 2.3 percent decline from the previous month, on 1 December 2024 prompting the Prime Minister to express satisfaction over what he termed “a record decline” in inflation which, he projected, would lead to a decline in the discount rate with an obvious positive impact on borrowing from banks by the private sector that, in turn, would fuel growth.
The Prime Minister’s economic logic maybe impeccable but his optimism my not be shared by the general public or economists for that matter.
The general public failed yet again to experience any feel-good factor due to a decline in CPI because the day before the lower rate was announced, on 30 November, the government raised petroleum prices effective 1 December significantly — petrol by 3.72 rupees per litre and high speed diesel by 3.29 rupees per litre.
The notification states that there was no rise in petroleum levy or, in other words, the rise in prices was attributable to what is being termed a slight rise in the international prices of these two products as well as 60 rupees per litre petroleum levy, 16 rupees per litre customs duty irrespective of production locally or abroad, and 17 percent per litre distribution and sale margins to oil companies and their retailers.
This age-old formula requires a revisit, given the 41 percent poverty levels in this country today. In addition, while the CPI does not specify the precise weightage it gives to fuels as it lumps housing, water, electricity, gas and fuels together with a combined weightage of 23.63 percent, yet the linkage between the lower the income the higher the kitchen budget outlay on fuel is well established in surveys.
In addition, transport has a weightage of 5.91 percent whose indices as per the PBS rose marginally – from 299.63 in October to 301.798 in November. The two items taken together reveal that if wages do not rise, and the wages of the private sector providing employment to 93 percent of the country’s entire work force have not risen for more than five years, the general public (41 percent living below the poverty line) is unlikely to experience a rise in their disposable income.
Economists, however, are still seeking clarity as to whether the discount rate linkage is to the CPI (which was the stated policy during PTI government’s tenure) or whether it is once again linked to the less volatile core inflation, non-food and non-energy, which has been the practice in this country.
It is, therefore, critical to note that core inflation (urban), as per the PBS, was 8.9 percent in November 2024 year on year – 0.3 percent higher than the 8.6 percent prevalent in October 2024; while core inflation (rural) was estimated at 0.7 percent lower in November than in October – at 10.9 percent against 11.7 percent. Data of core inflation does not, therefore, indicate that a decline in the discount rate is on the cards.
It is relevant to note that the documents, including the staff-level agreement reached on the ongoing loan, uploaded on the International Monetary Fund website in October notes that “a pronounced drop in food inflation helped reduce headline inflation to 9.6 percent in August, and the Monetary Policy Committee lowered its policy rate by 150 bps and 100 bps (to 19.5 percent) in their June 10 and July 29 meetings,” which indicates discount rate linkage is to the CPI.
The Fund further cautions the authorities that the “policy rates will remain substantively positive in real terms and data-dependent to adjust quickly to evolving price dynamics. At the same time, to support monetary policy formation and implementation, the inflation expectation survey will be aligned with best practice” – a gentle nudge not to fudge data.
To conclude, the flexibility to understate inflation is no more than 3 to 4 percent which, given that the CPI declined by 2.3 percent in November compared to the month before is within the margin of error. This should be a source of concern and must dampen the euphoria by cabinet members that inflation has reached its lowest level in recent months.
Copyright Business Recorder, 2024
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