Nothing can erode a political government's popularity faster than a rise in inflation accompanied by an income raise lower than the rate of inflation. While the Khan-led administration did take politically extremely exigent decisions, many of which were challenged by independent economists particularly relating to their upfront loading, yet by end February the Prime Minister realized that his political capital was fast eroding in all walks of life - from the youth struggling to find jobs in a contracting economy to the industrial sector struggling to compete internationally with rising input costs, and the general public unable to withstand the eroding rupee value especially those employed in the private sector.
The outcome: a freeze on utility tariffs since January 2020 indicating that the IMF condition to achieve full cost recovery is compromised, a reduction in petroleum rates though not by as much as the reduction in the international market by raising petroleum levy effective 1 March to 12.33 per litre, up from 6.56 per litre in February, a rise of a whopping 88 percent. The rate of inland freight margin declined from February's 2.72 to March's 2.46 rupees per litre, and sales tax from 14.45 to 13.43 per litre, an adjustment to ensure that the actual revenue from this source remained unchanged. Why was only PL raised and not sales tax? The answer is fairly obvious and a reflection of decisions supported by previous administrations grappling with a rising budget deficit made all the more difficult to ignore while on an IMF programme: PL is credited entirely to the federal government account while sales tax goes into the federal pool which is then distributed between the provinces and the federation as per the National Finance Commission award. Petroleum levy as per the budget documents approved by the IMF as a prior condition was projected to generate 216 billion rupees - an amount that would be more than doubled with the raise in the PL for the remaining four months of the year or around 72 billion rupees more if demand remains static and the international price does not rise.
In effect, if the government does succeed in meeting the 4.7 trillion rupee target tax collection, an amount reportedly shared with the IMF team during the second review meeting, then the additional 72 billion rupee from PL would bring the total to nearly 4.7 trillion rupees, which may have allowed the Fund to show some flexibility in its reported insistence to meet the target of 4.9 trillion rupees tax collection target.
One would have to wait and see whether transporters of people and goods would pass on this decline in petroleum prices to the common man though past experience both in Pakistan and outside is that prices generally exhibit downward stickiness; however those with their own transport are likely to benefit and given that there are more people who own their own transports in cities the difference in inflation between the urban and rural centres may widen.
The contribution of the reduced prices on the rate of inflation would be significant and reduce the Consumer Price Index further. As matters stand today the month on month reduction in February relative to January 2020 was 1.04 percent which the government is touting as a reflection of a downward trend. Be that as it may, it bears thinking that inflation rise has been slightly adjusted and the rate rise is still too high.
In Pakistan today with economic activity stifled due to tight monetary and fiscal policies the private sector has by and large been unable to give a pay raise to those staff members it has retained (redundancies have been evident though not calculated nation wide yet) leave alone a raise commensurate with the rate of inflation. Thus with the rate of Consumer Price Index (CPI) at 14.6 percent for January 2020 the income of those working in the private sector has eroded further. The rising trajectory in the loss of the value of each rupee earned has been fairly consistent since June 2019 year on year as per the Pakistan Bureau of Statistics (PBS): 8 percent in June, 8.4 percent in July, 10.5 percent in August, 11.4 percent in September, 11 percent in October, 12.7 percent in November, and 12.6 percent in December. There was a slight downward adjustment month on month in October and December however the decline was in the rate of rise and not reflective of an actual decline in inflation.
In October and December the CPI declined in urban centers (from 11.6 percent in September to 10.9 percent in October and from 12.1 percent in November to 12 percent in December) while it rose in the rural areas (from 11.1 percent in September to 11.3 percent in October and remained stable at 13.6 percent in November and December 2019). And not surprisingly as it has been much in the news the major contributor to the rise in prices was food in both urban and rural areas - 15 percent in September 2019 down to 13.7 percent the next month followed by 16.6 percent in November and 16.7 percent in December. Rural areas witnessed 15 percent food inflation in September (same as in urban centres) followed by a dip the next month to 14.6 percent and then 19.3 percent in November and 19.7 percent in December.
The difference in inflation between rural and urban centres can be attributed to the relatively small number of utility stores in rural areas which disables the PBS from using the government subsidized rates in utility stores as a yardstick in calculating the headline inflation. Another reason could well be that the urban CPI sets 30.42 weightage for food and non-alcoholic beverages with 25.97 for non perishable food items and 4.46 on perishables. Rural CPI gives 40.87 weightage to food and non-alcoholic beverages with 35.08 to non-perishable food items and 5.79 to perishables. Surprisingly, alcoholic beverages and tobacco is given a higher weightage - 1.28 - in the calculation of rural CPI and 0.85 for urban CPI.
The Sensitive Price Index surveys 53 instead of the 76 markets surveyed by the CPI and it takes account of 33 major food items with a weightage of 68.19 percent.
As income is a major contributor to consumption patterns five income quintiles are used notably up to 8000 rupees, 8001 to 12000 rupees, 12001 to 18000 rupees, 18001 to 35000 rupees and above 35000 rupees. The numbers in rural areas with middle income to high income levels would be a lot smaller than the number in urban centres which is another reason for the difference in the inflation feel in rural relative to urban centres. The Economic Survey 2018-19 notes that the inflationary pressure was the highest on incomes above 35000 rupees, 8.4 percent, and lowest on incomes up to 8000 rupees at 4.9 percent - the reason probably as the lower income groups were mainly purchasing food items. This is likely to have changed in recent months given the massive rise in food inflation.
SBP 2006 research paper notes that "the extreme price changes in the tails of the distributions are considered to be unrepresentative of the underlying inflation trend." This has been certainly true with respect to the extreme volatility in the price of tomatoes, wheat/flour and sugar in recent months.
To conclude, while perishables are subject to distribution issues and not representative of underlying inflation yet there is little doubt that inflation would decline though it must be borne in mind that its rate of increase would decline though inflation would continue to rise.
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