NationalVOLUME 17 ISSUE # 11

Consumer miseries compound

Against tall government claims, prices of consumer goods continue to rise in the country as the rupee remains under pressure against the US dollar, while the current account deficit continues to widen.

However, the government claims the situation will improve in the next three months when international commodity and fuel prices would come down. Recently, Prime Minister Imran Khan asked people not to be impatient and wait for a few more months for relief from rising prices. He has been promising the relief to the people for the last three years but to no avail.

Inflation in December 2021 edged up to 12.3pc from 11.5pc in November, the largest increase recorded in nearly two years, according to the Pakistan Bureau of Statistics (PBS). Measured by the Consumer Price Index (CPI), inflation increased to its highest level in 21 months, driven by a record rise in global oil prices, undermining earlier gains. The recent rise in oil price prices was the highest ever in the country’s history, which is expected to lead to an increase in the cost of food items due to higher transportation charges.

The year-on-year increase in inflation in recent months is mainly driven by soaring prices of fuel, electricity, house rent, transport and non-perishable food items. Food inflation in urban areas shot up to at 11.7pc in December on a yearly basis and declined by 2.3pc on a monthly basis, whereas the respective growth in prices in rural areas was 9pc and a decline of 3.1pc. However, the data showed that in rural areas, non-food inflation was higher than that recorded in urban areas – a reversal of the trend that is usually witnessed where urban areas suffer higher inflation.

According to a recent finance ministry report, global commodity prices surged to unprecedented levels, putting pressure on currencies and pushing inflation around the world to higher levels. The Food and Agriculture Organisation has estimated that world food prices have climbed by 27pc, a 10-year peak, while developed countries such as the US and the UK had seen their highest-ever increases in inflation. In Pakistan, average inflation between July and December 2021 rose to 9.81pc on a yearly basis. After surging to 12.4pc in February 2020, inflation had been on the decline – helped by a drop in prices of agricultural products. However, the massive spike in oil prices earlier this year has reversed the trend. In 2020-21, annual CPI inflation was recorded at 8.9pc against 10.74pc the previous year.

A massive depreciation of the rupee has also fuelled import-led inflation, while the withdrawal of sales tax exemptions on imported food items is also expected to accelerate the rate of inflation in the coming months. Last month, the rupee had closed at its all-time record low of 178.24 against the US dollar before appreciating the following two days to end the year at 176.51. The reversal comes on the back of rising oil prices in international markets, raising concerns of a spike in import figures.

Pakistan’s current account recorded a deficit of $7 billion in the first five months (July to November) of the current fiscal year, mainly on account of increasing imports, according to the State Bank of Pakistan (SBP). At $1.91b, November saw the highest monthly current account deficit since July 2018, when it had reached $2.1b. This was the year when the country faced a record $20b current account deficit. However, the five-month figure of $7b is in total contrast to a current account surplus of $1.64b during the same period a year ago. The current account deficit widened from $1.76b in October to $1.91b in November “as imports outstripped strong exports and robust remittances”, the SBP tweeted. “Imports were mainly lifted by high international commodity prices in addition to strong domestic economic recovery.” In its December 14 monetary policy, the SBP said the current account deficit for the ongoing fiscal year would come in at 4pc of GDP — higher than the earlier forecast of 2-3pc of GDP. However, the five-month deficit has already reached 5.3pc.

However, State Bank of Pakistan (SBP) Governor Dr Reza Baqir is upbeat the country has the capacity and financial cushion to ride out rising external account pressures being driven by a surge in global commodity prices. “The pressure should ease soon as central banks around the world tighten monetary policy, which is likely to curb rebounding global demand,” he told foreign media. He said the surge in global commodity prices over the past few months was being driven by a sharp recovery in demand as economies bounced back from a Covid-induced slump. “But as central banks begin to turn hawkish, it is going to moderate global demand growth; that in turn is what is going to bring down international commodity prices. We (Pakistan) just have to get through it until this commodity supercycle ceases,” he said, adding that two thirds of the rise in the trade deficit over the past few months had been driven by surging global commodity prices.

Pakistan’s imports grew 65pc year-on-year to over $40 billion in the first half of the current financial year, while exports rose 25pc to $15.1 billion. Over the same period, the trade deficit has more than doubled to $25.4 billion from $12.3 billion. Pakistan’s foreign exchange reserves stand at $24 billion, up sharply from $7.2 billion in 2018-19. Out of the $24 billion, $17.6 billion is currently held at the central bank.

As oil prices continue to rise, experts fear inflation will remain high in the country and people would continue to suffer. Their plight is compounded by bad governance and inaction by provincial governments.