FeaturedNationalVOLUME 17 ISSUE # 15

Bracing for more price hikes

Prices have reached a record high in Pakistan and people brace themselves for more hikes after the Russia-Ukraine crisis has deepened and crude oil rates have jumped to over $100 a barrel for the first time in eight years. The inflation rate, which reached another peak of 13pc in January, the highest in nearly two years, is set to increase further. It will also put pressure on the government which is already nervous about its future after the opposition has announced protest demonstrations and a no-confidence move against it.

Fuel price hikes do not come alone; they also increase rates of food and other necessities of life. It will also jack up the electricity tariff, creating another wave of inflation across the country. Prices in the country fluctuate with a change in fuel prices, electricity tariff and the rupee rate against the dollar. Prices of petroleum products have already reached a record high. On February 15, the government increased prices of petroleum products by Rs10 to Rs12 per litre. As a result, prices of food, essentials and consumer goods have increased significantly. Flour prices have risen by Rs50 to Rs1,150/20kg bag. The Pakistan Flour Mills Association said recent hikes in electricity tariffs, prices of petroleum products and packing materials forced the millers to adjust flour rates upward. Transport owners have also increased their fares.

According to the Pakistan Bureau of Statistics (PBS), Sensitive Price Indicator (SPI)-based weekly inflation increased by 0.22pc while it surged by 18.09pc on a year-on-year basis in the week which ended on February 17. However, weekly inflation for the lowest income group decreased by 0.16pc, while it went 19.40pc up on a year-on-year basis for the group. For the groups with monthly incomes of Rs17,733-22,888, weekly inflation slipped 0.26pc, while it surged 16.98pc on a YoY basis. However, for other income groups, inflation went up from 0.14pc to 0.45pc and increased from 16.41pc to 18.43pc on a year-on-year basis. In January, the inflation rate peaked to 13pc, making it the highest in nearly two years.

The latest escalation in Russia-Ukraine tension may also have serious repercussions for Pakistan, its economy and people. It may further push up fuel prices and trigger another wave of inflation in the country. Pakistan’s import bill may swell and its current account deficit could widen further. It might also weaken the Pakistani rupee against the dollar. Prices of LNG and coal would also move upwards. If Europe stops purchasing gas from Russia and switches to LNG to meet its energy needs, it will inflate LNG rates, which Pakistan has to import to meet its energy and domestic needs. As Pakistan generates electricity from imported LNG, it would further jack up electricity rates. In recent years, Pakistan had to import wheat from Ukraine, which would be available at higher rates after volatility in the region. Last year, Pakistan imported 1.39 million ton wheat from Ukraine.

The International Monetary Fund (IMF) has already warned Pakistan that inflation in the country is expected to pick up this year before gradually slowing down. It noted that economic activities in Pakistan had rebounded strongly from the first wave of the pandemic but pressures also started to build, reflected in a widening current account deficit and rising inflationary pressures. Pakistan’s recent economic and financial policy efforts, however, were appropriate to safeguard macroeconomic stability and debt sustainability, it added. The IMF reminded Pakistan that continued commitment to a market-determined exchange rate and a prudent macroeconomic policy mix will help reduce the current account deficit, and ease external pressures over the medium term. It also urged Pakistan to make extra efforts to revitalise its economy, noting that recent policy adjustments in Pakistan were appropriate to address these challenges and maintain economic stability. Further ambitious efforts to remove structural impediments and facilitate the structural transformation of the economy will help unlock sustainable and resilient growth. The IMF pointed out that making those extra efforts would also foster job creation and improve social outcomes for the benefit of all Pakistani citizens.

Last month, the Ministry of Finance painted a rosy picture of the country’s economy, estimating the average monthly growth at around 5pc during the current fiscal year despite inflationary pressures and consequent tightening of policies. In its Monthly Economic Indicator (MEI) report, it noted that demand for Pakistani exports was rising, but warned, “We should not ignore impending risks including the concerns of the policymakers about inflationary effects and the resulting policy response.” However, it hoped inflation might ease out in the coming months due to the declining commodity prices in the global market. In addition, relief may also come from continuous government efforts to soften food prices in the local markets by following appropriate fiscal and monetary policies. It hoped the developments and policies might keep the monthly price dynamics in check and soften the current stress on the trade balance, easing exchange rate pressure and subsequently stabilising inflation. “Strong domestic economic dynamism requires imported energy, capital goods and intermediate goods, necessary in the production process. Further, a recent increase in international commodity prices has inflated the cost of the imported goods. However, imports may settle at lower levels gradually in the coming months,” it predicted.

However, its projections have largely proved wrong as prices continue to increase in Pakistan against all hopes and efforts. The government adds to inflation by increasing fuel prices every fortnight. A lack of coordination between federal and provincial governments also adds to the problem, which is compounded by the absence of local governments.