EDITORIAL: Finance Minister Muhammad Aurangzeb after attending the inauguration ceremony of ‘Made in Gujranwala Exhibition’ organised by the Gujranwala Chamber of Commerce and Industry acknowledged that the benefits of a very low inflation rate were not being passed on to the general public - Sensitive Price Index for the week ending 10 April 2025 was negative 0.83 percent week on week and negative 2.81 percent year on year while the Consumer Price Index for March registered a low of 0.7 percent.
Data released by the Pakistan Bureau of Statistics (PBS) suggests that there was a dramatic decline this week past in the prices of essential food items, including tomatoes negative 12.82 percent, garlic negative 14.73 percent, onions negative 11.40 percent, wheat flour, eggs negative 7.40 percent with two major non-food items registering a decline - petrol 11.89 percent and diesel 8.29 percent.
The food and non-food items registered majorly contained increase (less than one percent for all items except pulse gram at 1.63 percent) and LPG 0.64 percent, long cloth 0.54 percent and cigarettes 0.06 percent.
Sugar whose price is led by the elite/political influential manufacturers registered a week on week raise of 16.21 percent, and vegetable ghee 16.21 percent. Be that as it may, there is concern that inflation rate data is being manipulated for political reasons, which explains why the October 2024 report noted that the IMF would support the “government align inflation expectation survey with best practice….shortcoming remain in the source data available for sectors accounting for around a third of GDP, while there are issues with granularity and reliability of Government Finance Statistics.”
In spite of the decline in CPI prices from December 2024’s 4.1 percent to March 0.7 percent yet the Monetary Policy Committee which last met on 10 March 2025 projected inflation to “gradually inching up and stabilizing within the target range of 5-7 percent.
This inflation outlook, however, is susceptible to risks emanating mainly from volatility in food prices, timing and magnitude of energy price adjustments, additional revenue measures, protectionist policies in major economies and uncertain outlook of global commodity prices.“ There is, therefore, no room for complacency.
Aurangzeb deserves to be complimented for acknowledging that the benefits of a low inflation rate have not been passed on to consumers and pledged that he would provide relief to the salaried class as well as further cut power rates.
Economists argue that lower tax on the salaried class while continuing to rely heavily on indirect taxes (whose incidence on the poor is greater than on the rich) with 75 to 80 percent of all direct tax collections sourced to withholding taxes imposed in the sales tax mode, will have limited impact on benefiting the poor unless pledged reforms are implemented, which include widening the tax net and not taxing the already taxed as has been the past practice as well as in the current year’s budget.
Pakistan also as per the IMF’s October 2024 report on requesting an Extended Fund Facility programme noted three major issues in three major sectors of the economy: (i) government price setting and procurement operations have made the agricultural sector unresponsive to changing consumer preferences, exacerbated price stability and hoarding undermined the incentives for innovation, misallocated resources, and placed a burden on fiscal sustainability.
Going forward, these interventions should be discontinued; (ii) despite the significant (and persistent) dispersion in productivity across sectors, especially between the agricultural and non-agricultural sectors, resources did not move from relatively less-to-more productive areas.
In particular, Pakistan has seen one of the smallest declines in the share of agricultural employment amongst EMDCs since 1990.
Moreover, low investment together with protectionism and weak competition, harmed innovation in production (resulting in declining economic complexity) and preventing any potential transition to more complex goods, which are “related” to those Pakistan currently produces; and (iii) Implementation of necessary electricity and gas tariff adjustments over the past year is welcome and needs to continue.
In parallel, resolving the energy sector’s problems and restoring its viability urgently requires reforms to improve distribution and transmission efficiencies and lower generation costs, which will ultimately also allow for tariffs to fall.
This exhortation is extremely relevant as the government projection of financial gains due to IPPs contracts renegotiations reflects a future outflow and the recent price decline is on the back of lower fuel costs by not passing on the decline in the international petrol prices to consumers effective middle of March 2025 and instead reduced electricity rates across the board.
The authorities are no doubt hoping that lower rates would incentivise exporters, an assumption that is facing challenges not only because of the 29 percent US tariffs, our largest trading partner, but also because our electricity rates are still nearly double those of regional competitors. The Fund instead proposes medium-term transition toward cash programmes for energy support.
It is relevant to note that the PBS-released data indicates those whose income is between 17,732 rupees per month (an amount that is way less than the minimum wage of 37,500 rupees per month) up to 29,517 rupees per month suffered an inflation of on average over negative 3.26 percent while those with higher incomes were subjected to on average of a little more than negative 2.5 percent.
In other words, while the ongoing Fund programme gives the authorities little leverage to implement in-house policies yet it stands to reason that this leverage can and must be created through slashing current expenditure and not raise it by 21 percent like in the current year.
This would allow the government to begin the politically challenging decision to widen the tax base in a phased manner rather than simply agreeing to raise tax revenue target by 2 to 3 trillion rupees as suggested by the Fund staff.
Copyright Business Recorder, 2025
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