FeaturedNationalVOLUME 15 ISSUE # 09

Crushing inflation

The Pakistan Tehreek-e-Insaf (PTI) government has increased power tariff for the fourth time in 11 months. Inflation has risen to the highest level in nine years and the central bank has warned that inflation could rise beyond the target set for the current fiscal year. It spells disaster for the common people who have already been crushed by rising prices of essentials.

Though the government claims it has come out of economic crisis, yet all indicators paint a bleak picture for the people. The only positive sign for the country is that Moody’s Investors Services has upgraded its outlook from “negative” to “stable” after it had downgraded Pakistan’s ratings outlook to negative last year in June, citing heightened external vulnerability risk due to depleting foreign exchange reserves. “The change in outlook to stable is driven by Moody’s expectations that the balance of payments dynamics will continue to improve, supported by policy adjustments and currency flexibility. Such developments reduce external vulnerability risks, although foreign exchange reserve buffers remain low and will take time to rebuild,” it said.

Except Moody’s upgrade, there is bad news from all economic fronts. The State Bank of Pakistan (SBP) has warned inflation could rise beyond the target set for the current fiscal year. Inflation has already risen to 12.7pc year-on-year, the highest level in nine years mainly driven by an increase in prices of food items, according to the Pakistan Bureau of Statistics (PBS). The shortfall in tax revenue has widened to a whopping Rs218 billion in just five months of the fiscal year which has again raised prospects of a mini-budget after the rejection of Pakistan’s request for the downward revision of the annual target by the International Monetary Fund (IMF).

The Asian Development Bank (ADB) has approved $1.3 billion budgetary support loan for Pakistan, including $1 billion in crisis response facility to shore up low official foreign exchange reserves. It is for the first time in Pakistan’s history that a political or military government has availed the crisis response facility to repay its foreign debt and build up foreign currency reserves. The loan proves that the country is still finding it difficult to pay international liabilities, despite signing a $6b loan package with the International Monetary Fund (IMF) few months ago.

In a move that will further overburden people, the government approved an increase of 1.75% in electricity prices for the consumers using more than 300 units a month to recover an additional Rs25 billion. The fourth increase in tariffs in 11 months was also aimed at complying with the condition of the IMF to restrict the growth of circular debt to an agreed level. The increase has taken effect from December 1 and it will continue for one year, according to a decision of the Economic Coordination Committee (ECC) of the cabinet. The government has been constantly jacking up base electricity tariffs to stop the growth of circular debt as its measures for efficiency gains are not yielding desired results. It first increased power tariffs in January this year, then on June 14 and October 1. All the increases were aimed at meeting the IMF conditions.

The State Bank of Pakistan (SBP) has kept the interest rate unchanged at 13.25 per cent as expected due to high inflationary pressures. The bank’s monetary policy statement said that annual average inflation in the ongoing fiscal year remained broadly unchanged at 11-12pc. However, it warned recent changes in month-on-month inflation had been higher than in previous months and if sustained, could affect inflation expectations. “On one hand, recent inflation outturns have been on the higher side. On the other, the causes behind these outturns have primarily been increases in food prices which are expected to be temporary,” it said.

Inflation rose to 12.7 per cent year-on-year, the highest level in nine years mainly driven by an increase in prices of food items, the Pakistan Bureau of Statistics (PBS) reported. Inflation, measured by the Consumer Price Index (CPI), edged up by 1.3pc over the previous month after the PBS revised its calculation methodology by setting the new base year 2015-16 instead of the previous 2007-08 financial year. However, the Finance Ministry claimed that inflation would come down from the next month, without elaborating. The data showed that higher prices of food items had been the largest driver in overall inflation in November. It was also observed that the prices of essential food items are higher in rural areas than in urban areas. Food inflation in urban areas rose by 16.6pc in November on a yearly basis and 2.4pc on a monthly basis and that in rural areas by 19.3pc and 3.4pc, respectively.

The International Monetary Fund has estimated that Pakistan’s inflation may jump up to 13pc, but the government’s estimate is between 11pc and 13pc for the current fiscal year. To compound the situation for the common people, the shortfall in tax revenue has widened to a whopping Rs218 billion in just five months of the current fiscal year. From July to November, the Federal Board of Revenue (FBR) provisionally collected Rs1.611 trillion in taxes and fell short of its five-month target by Rs218 billion, according to officials. The tax agency was supposed to collect the twice downward revised monthly target of Rs1.830 trillion from July to November. The downward revised target for November was Rs411 billion that the FBR cut to Rs381.4 billion. Yet it missed the monthly target by Rs54 billion, further widening the shortfall to Rs218 billion in five months.

The dwindling revenue suggests the government will have to impose more taxes and increase their rates to overcome the shortfall. The frequent power tariff hikes have also added to inflation. The prices of essentials will continue to rise as the government blatantly passes on the costs of its own inefficiency, power theft and line losses to consumers. It will have to stabilise power tariff to stop prices from rising further.