EDITORIAL: Inflation data released by the Pakistan Bureau of Statistics (PBS) reveals that consumer price index (CPI) increased by 9.04 percent last month compared to 8.2 percent in August 2020. While the Prime Minister's advisors on Finance and Commerce - Dr Hafeez Sheikh and Razzak Dawood - recently expressed their distrust at the inflation data compiled by PBS yet with no measures, administrative or otherwise, taken to strengthen the Bureau's capacity and with no alternate data available one is compelled to take the statistics released by PBS at face value.
The major contributors to the inflationary spiral remain perishable food items partly attributable to (i) seasonal factors (inexplicably the price of potato rose by 6.81 percent in September in comparison to August at a time when the government is debating whether to allow potato exports to Russia because of a surplus crop in this country - an item used in the manufacture of vodka), (ii) partly due to the rise in transport costs as a consequence of the rise in petrol prices with a significant tax component, and (iii) partly due to supply chain issues due to delayed/flawed decisions pertaining to ensuring the availability of some commodities in the domestic market for example wheat and sugar while blaming their price rise entirely on the 'mafias', more accurately defined as cartels. The Competition Commission of Pakistan (CCP) has so far been unable to take any appropriate action to deal with cartelization in the country due to legal lacunae in the system as well as some capacity issues which remain unresolved to this day.
There is also the element of a rise in prices of imported commodities, including petroleum and products due to factors that are external to our economy; however, domestic factors, particularly the continued decline in the rupee value vis a vis the dollar, are contributing significantly to inflation in the country.
Fiscal deficit also fuels inflation and was estimated at 9.1 percent for 2019-20 in the federal government's budget documents, but the government's revised estimates placed the deficit at 8.1 percent. While the actual deficit is thankfully one percent lower than the projected deficit yet even 7 percent fiscal deficit, the projected target for the current year, is considered unsustainable. Be that as it may, the budgeted 7 percent target appears highly unrealistic given the tax revenue target of 4.9 trillion rupees with a 2.1 percent growth projection that is not supported by multilaterals with the International Monetary Fund (IMF) projecting a more realistic GDP growth rate of 1 percent in the current year.
The outcome of the latest data must give pause to the State Bank of Pakistan (SBP) that, constrained by conditions agreed with the IMF, had linked the discount rate to CPI till the onslaught of the pandemic in March 2020 that contracted economic activity leading to reduced production, build-up of unsold inventory and lay-offs last calendar year. At present the discount rate is 7 percent, 2 percent lower than the September CPI, while the government is claiming that economic activity has picked up due to: (i) monetary policies (extending cheaper credit to specific groups/sectors and to companies/institutions hard hit by the pandemic as well as the amnesty to builders till end December 2020); and (ii) fiscal policies (no new taxes in the current year's budget though the projected revenue collection is not considered achievable by independent economists). In other words, demand push inflation may have resurfaced which the central bank reportedly noted during the 20 September 2020 meeting of the Monetary and Fiscal Policies Coordination Board is no longer an issue.
To conclude, there are multiple factors for the high inflation rate with an overwhelming contribution by the ongoing monetary and fiscal policies. It is about time the Prime Minister took cognizance of the need for his economic team to engage with the IMF with a view to tweaking EFF programme conditions that would give greater flexibility to the economic team. This would enable them to deal with this as well as other compelling issues within the economy instead of focusing entirely on 'mafias' and smuggling across our porous borders because this focus has not resolved the issue of rising prices.
Copyright Business Recorder, 2020