FeaturedNationalVOLUME 17 ISSUE # 41

Crushed under heavy prices

Frequent electricity and fuel price hikes have created the worst inflation in the country. The Pakistani rupee has again started sliding down against the dollar after making some recovery, which is further compounding the problem. The state of affairs is already beyond the patience threshold of the common people but national and international institutions have warned that prices would continue to climb in Pakistan in the months to come.

The government claims its policies are aimed at providing relief to the common people. However, all efforts of the government have proved to be counterproductive. Prices of food and other essentials increase on a daily basis and the government appears to be helpless. As inflation continues to increase, people have reached the conclusion that the government has no qualms about overburdening them and leaving them at the mercy of profiteers and hoarders.

International institutions say inflation in Pakistan is the highest in the region and the situation will not change in the months to come. The Asian Development Bank (ADB) projected that inflation in Pakistan would remain the highest in the region in the current year. The World Bank said inflation would edge up in FY22 with domestic electricity tariff hikes, and higher oil and commodity prices before moderating in FY23. Inflation based on the Sensitive Price Indicator (SPI) has surged by around 45pc in the week which ended on August 25, according to the Pakistan Bureau of Statistics (PBS).

According to the International Monetary Fund (IMF), Pakistan’s economy will slow down to around 3.5pc due to weakening economic conditions and the average inflation rate would peak to nearly 20pc by the end of the current fiscal year on the back of currency depreciation and higher commodity prices. The Ministry of Finance has also warned that flash floods might impact Pakistan’s economic outlook. The recent floods, caused by abnormally heavy monsoon rains, have adversely affected important and minor crops, which may affect the economic outlook through agricultural performance, the ministry said in its monthly economic outlook.

The unusual heavy monsoon rains and flash floods are initially estimated to cost Pakistan’s economy over $4 billion in the current fiscal year as the calamity has badly hurt agricultural activities in Sindh and Balochistan. While it is early to assess the actual impact, Pakistan, where agriculture has a 23pc share in gross domestic product (GDP), can remain highly vulnerable in the aftermath of the floods. Repercussions may include higher imports, compromise on exports and rising inflation, which will undermine efforts of the government to tackle the macro headwinds. “Based on our preliminary estimates, the current account deficit may increase by $4.4 billion (1pc of GDP) – assuming no counter-measures are taken, while around 30pc of the CPI (Consumer Price Index) basket is exposed to the threat of higher prices,” said JS Global Research in a report. The situation may force the government to make additional imports of cotton worth $2.6 billion, wheat worth $900 million and the country will lose textile exports of around $1 billion. This comes to around $4.5 billion (1.08pc of GDP) in the current fiscal year. Owing to the flash floods, the consumers are expected to face supply deficit of household groceries such as onion, tomato and chilli, it warned.

The worst affected crop is cotton. Farmers produced 8 million bales in the previous fiscal year, but now they will again have a poor crop, like previous years, amid heavy rainfall in Sindh. Cotton sowing has reportedly been destroyed to a large extent in Sindh. “Assuming the country requires import of cotton to fulfill 80pc of demand this year, the import bill will likely exceed $4.4 billion (+144% year-on-year) in FY23,” it estimated.

On the other hand, any unavailability of imported raw cotton or other unprocessed textile will negatively impact the country’s textile exports. Rice is another crop that is expected to endure massive damage in the ongoing floods. It is among the few crops where the area under cultivation has increased significantly in the recent past (+20% in two years). It contributes $2.5 billion in annual exports. “Damage to rice crops will result in loss of exports, in addition to a slight reduction in GDP growth and higher CPI inflation,” the report said. As water from the flash floods is believed to take two to three months to disappear, the aftermath is likely to result in delay in wheat and edible oil seed sowing. Delay in wheat plantation will be a double blow as many farmers have already switched from wheat to edible oil seed cultivation. Moreover, the post-flood situation is also expected to negatively impact the yield of upcoming wheat crops. With the delay in sowing and higher wheat import prices, the import of 15pc of wheat demand of 30 million tons may take its import bill to $1.7 billion in FY23.

Alongside crops, more than 500,000 livestock have reportedly perished in the floods. This will add to the burden on the rural people, already reeling from higher diesel and fertiliser prices, and will lead to the shortage of milk supplies. Moreover, the shortage of livestock, coupled with the probability of disease outbreak among the cattle, can also cause the scarcity of meat. Besides, tomato prices have already started increasing due to the monsoon. This together with wheat, edible oil, milk and meat hold 18pc weight in the CPI basket. It poses the risk of high food inflation (at 28pc; a 13-year high). “Any risk to food security, shortages and bottlenecks in the supply chain will cause an increase in our existing FY23 CPI estimate of 21pc,” the research warned.

In July, the National Electric Power Regulatory Authority (Nepra) allowed distribution companies to charge an additional Rs155 billion to compensate for the higher fuel generation cost in June. The authority allowed an unprecedented fuel cost adjustment (FCA) of Rs11.37 to K-Electric and Rs9.89 per unit to electricity distribution companies. Earlier, the government had also announced an increase of Rs7.91 per unit in the average base tariff across the country in three phases starting from July. It had approved Rs1.55 per unit increase in the base tariff across the country under a quarterly adjustment. It raised the national average electricity tariff up to Rs24.82 per unit from Rs16.91. It triggered nationwide protests and an unprecedented wave of inflation, which forced the government to announce a relief package for consumers.

There are some indicators that the economy is heading in a positive direction but the common people have suffered badly in the process. The government does not hesitate from overburdening the people with frequent price hikes. People are worse off in the coalition government’s short tenure. They have been forced to miss the past PTI government despite its mismanagement. Prices have reached their highest level in Pakistan. The government aims to introduce more reforms. It means there is no prospect of relief for the people anytime soon and they will continue to suffer.