FeaturedNationalVOLUME 15 ISSUE # 11

Inflation explosion

Prime Minister Imran Khan and his ministers claim to have brought the economy out of an “intensive care unit” (ICU). The government’s assertion may be right but it has pushed the people of Pakistan to an ICU after a massive price hike of essentials in the first 16 months of its rule.

The government of Prime Minister Imran Khan doubled power tariff in its first year, which took past governments five years. When electricity prices were increase by 1.75pc in November last year, it was the fourth hike in 11 months in the Pakistan Tehreek-e-Insaf (PTI) government. Besides the regular hikes, power tariff is also increased almost every month on the pretext of “fuel adjustment charges.” The government is set to further increase gas prices to eliminate the circular debt of Rs181 billion in the sector. The Petroleum Division has informed Prime Minister Imran Khan that the hike in gas prices is inevitable because of the high circular debt of Rs181 billion in the wake of a wide gap between average prescribed gas prices and weighted average sale prices. The government has also revised prices of fuel almost upward every month since its installation. The result is that prices of all essentials have gone through the roof and people have become poorer with every passing day in the PTI government.

The Ata Chakki Owners Association has increased the price of flour by Rs4/kg, subsequently selling it at Rs64/kg in the Punjab. A whopping 23pc increase in the price of the staple was recorded during the first year of the PTI government. The cost of flour had increased by Rs2/kg in its first month. Later, the price soared to Rs60/kg last year and Rs64/kg after the recent price surge. It really hurts poor households, which usually have large families. Pakistan’s inflation rate slightly eased to 12.63pc in December 2019, from 12.7pc in November 2019, but still scaled the highest level in nine years, the Pakistan Bureau of Statistics (PBS) reported. Inflation, measured by the Consumer Price Index (CPI), lowered by 0.34pc in December against November last year. The data shows that higher food prices were the largest driver in overall inflation. Prices of essential food items are higher in rural areas than in urban areas. Food inflation in urban areas rose by 16.7pc in December on a yearly basis but declined 1.7pc on a monthly basis whereas it increased by 19.7pc in rural areas and declined 1.1pc respectively.

The International Monetary Fund (IMF) has estimated that the country‘s inflation may rise as high as 13pc, but the government hopes to contain it within the range of 11-13pc for the current fiscal year. According to the finance ministry, the IMF in its first review of Pakistan’s economic performance has acknowledged that the government reforms programme is on track and producing results. Satisfied with the economic performance of Pakistan, the IMF has recently released $452 million as the second tranche, bringing total disbursements to about $1.45 billion. The IMF report acknowledges that the business climate has improved and market confidence is returning. The IMF also lowered the inflation projection for 2020 to 11.8pc, down from 13pc earlier on account of the fact that the administrative and energy tariff adjustments are expected to offset the effects from weak domestic demand. The report confirmed that inflation has started stabilising along with core inflation, and the SBP stance that no need for further rate hikes was appropriate. However, the government hopes to do much better than the IMF projection. As inflation during July-November was 10.8pc, the government aims to bring it down to 5pc in the medium term.

According to the State Bank of Pakistan (SBP), average headline CPI inflation has reached 11.5 percent in Q1-FY20, extending the steep upward trend persistent since the beginning of FY19. In its first quarterly report, it observed, “Not only this level was double the inflation observed in the same quarter last year, it was also the highest level of quarterly inflation since Q4-FY12.” It was attributed to the lagged pass-through of the exchange rate depreciation towards the end of FY19; rationalisation of energy tariffs; and revenue-led fiscal measures taken in the budget 2019-20, which included the imposition of federal excise duty on a number of consumer items, and the ending of the zero-rating regime for export-oriented sectors and of the reduced GST regime on sugar.

In case of GDP, the report noted that the revised estimates for the kharif season suggest that the production of important crops is likely to fall short of the target for FY20. The large-scale manufacturing sector witnessed a decline of 5.9pc in Q1-FY20 on YoY basis. The contraction was broad-based, as construction-allied industries, petroleum and automobile industries continued on a downward path. In contrast, previous corrections in the exchange rate helped the export-oriented industries, as reflected in the relatively better performance of textiles and leather. On balance, however, achieving the real GDP growth target of 4pc appears unlikely, it observed. The report emphasizes the government to address the underlying structural vulnerabilities and put the economy on a balanced and sustainable growth trajectory.

According to the government, Pakistan’s economy has witnessed significant improvements in recent months as is evident from the performance of key economic indicators, like a stable exchange rate for five months, improvement in the Pakistan Stock Exchange 100-Index, improvement in foreign exchange reserves, and ease of doing index. However, the improving indicators have not benefitted the common people any way, rather they have been crushed by rising prices and their lives have become more miserable. They cannot be appeased by mere better economic figures. They need immediate relief from rising prices and the government will have to take urgent measures to restore their shattered confidence in political parties and democracy.