EDITORIAL: Sensitive Price Index (SPI) for the week ending 5 December 2024 was 3.57 percent year on year, a massive decline from the average annual July-November for the past two years at 30.8 percent in 2023-24 and 28.30 percent in 2022-23.
A similarly spectacular decline is noticeable in the Consumer Price Index (CPI) which fell from 31.4 percent in September 2023 to 28.3 percent in January 2024 to 4.9 percent in November 2024.
What should be concerning is the fact that core inflation (non-food and non-energy) has shown a decline which is not that remarkable – 18.6 percent in December 2023 to 8.9 percent in November 2024 and more tellingly the November figure reflected a rise of 0.3 percent in urban core inflation year on year and 1.2 percent month on month.
By definition CPI determines inflation by calculating prices of a fixed basket of goods while core inflation removes CPI components that exhibit large amount of volatility from month to month; however, an additional two possible reasons may account for the disparity in this country:: (i) the rupee-dollar parity is not a determining factor for core inflation while it is for CPI and to a lesser extent SPI.
The rupee-dollar parity reached a high of 303 on 8 September 2023 and has been fairly stable since – a stability achieved after some appropriate administrative measures.
Sceptics however challenge the stability of the external value of the rupee even when all major currencies in the world lost value the day after Donald Trump’s electoral victory; and (ii) while the government was under considerable political pressure to reduce inflation which, as per independent economists, is usually understated by 3 to 4 percent points, yet the discount rate is linked to core inflation, which the International Monetary Fund under the ongoing programme stipulated that “the authorities are committed to bringing core inflation down and re-anchoring inflation expectations.
In this regard, 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.”
We have repeatedly urged the government to implement homegrown budget, which seeks to increase collections from those with ability to pay rather than from indirect taxes whose incidence on the poor is greater than on the rich (disturbingly, the IMF approved budget for the current year continues its inordinate reliance on indirect taxes, to the tune of 75 to 80 percent of total collections), which is the main reason why the feel-good factor of a CPI and SPI reduction is not felt at the grassroots level but during the transition phase, which may take a few years, to massively slash current expenditure (which was bafflingly raised by 21 percent for the current year and approved by the Fund).
There are some inherent flaws in the IMF programme design, which argues that “more broadly, reducing fiscal dominance and credit objectives will be conducive to stronger monetary transmission and foster financing deepening and allocative efficiency, including by (i) limiting public sector borrowing demands through fiscal consolidation; (ii) retrenching from credit allocation, such as via SBP’s refinancing schemes, allowing a broader role for market forces; and (iii) relinquishing state ownership of financial institutions.” Or, in other words, the objective must be to reduce the need for government borrowing by trying to sell state-owned entities (SOEs) without first assessing the domestic and international environment and necessary work (the recent PIA sale fiasco bears ample testimony to a scale of incompetence that is mind boggling) but by ushering in an era of good governance through massive belt-tightening, impacting on the elite recipients of current expenditure – a thrust that is not only required by the federal government but also by all provincial governments.
Sadly, previous and incumbent administrations (federal and provincial alike) equate good governance with subsidies, be it for food items, electricity, free laptops and cheaper or free credit or other such gimmicks, that have led this country towards ever-rising indebtedness. Without expenditure prudence in the budget and within sectors, particularly energy, and structural change in what and who is taxed there is not going to be any appreciable movement towards a contented citizenry irrespective of improvement in some macroeconomic indicators.
Copyright Business Recorder, 2024