FeaturedNationalVOLUME 18 ISSUE # 39

Inflation’s unyielding grip: No relief in sight

The harassed consumers of Pakistan should expect no respite from inflation in the short run. This is the conclusion drawn by experts based on available facts and figures. According to the latest official data, the short-term inflation continues to rise with a year-on-year increase of 30.82 per cent for the week ending on Aug 10 due to a surge in electricity charges.

On a week-on-week basis, the short-term inflation, measured by the Sensitive Price Index (SPI), rose 0.69pc, and shows no signs of slowing down. Of the 51 items in the SPI basket, prices of 29 goods soared, five dropped and 17 remained unchanged compared to the previous week. After eight weeks of decline, the Sensitive Price Index has reversed its trend and is now on the upswing. This change is largely due to an increase in petroleum prices in July. The upward trend of the SPI is expected to continue as petroleum prices remain high.

The rupee depreciation, rising petrol prices, sales tax and electricity bills are among the key factors behind the rising inflationary trend. The government has taken tough measures — hikes in fuel and power tariffs, withdrawal of subsidies, market-based exchange rate and higher taxation — under the IMF programme to generate revenue for bridging the fiscal deficit, which may result in slow growth and higher inflation in coming months.

The government has shown no qualms in raising electricity prices which have now become unaffordable for the common man. In the latest round, petrol prices have gone up by about Rs20 per litre. There are also reports of a rise in gas tariffs in the days ahead. One reason is the rising trend in international oil prices and the second is that Pakistan is bound by its commitment to the International Monetary Fund to keep increasing petroleum development levy, end remaining subsidies on energy products and reduce the energy sector’s circular debt.

All indicators show that inflation is bound to remain elevated in the coming days. A special cause of concern is food inflation which is much much higher than general inflation — 40.2pc and 41.3pc, respectively, in urban and rural areas. The rising trend in domestic energy prices is expected to continue at least through March 2024, when the current International Monetary Fund’s nine-month Standby Arrangement will end.

According to the latest monetary policy statement by the State Bank of Pakistan, consumer inflation in FY24 ending in June 2024 is expected to be 20pc-24pc, down from 29.2pc in FY23. The central bank expects that the impact of monetary tightening undertaken in FY23 will take more time to show its full effect. It says consumer inflation will decline in the second half of FY24 (Jan-June 2024). But experts say that the SBP’s projection is too optimistic and may come true if aggregate demand slumps and the economy grows below the targeted 3.5pc, making life more miserable for people and businesses. It is relevant to note here that in FY23, the economy grew just 0.3pc, and the full fiscal year inflation averaged at 29.2pc; year-on-year inflation readings stood as high as 35.4pc in March, 36.4pc in April and 38pc in May 2023.

Regarding food inflation, the situation is bleak. Since February this year, food inflation has remained above 40pc in urban areas, and year-on-year monthly readings ranged between 40.2pc and 48.1pc. In rural areas, it has remained above 40pc since January, and annualised monthly readings have ranged between 41.3pc and 50.2pc.

Increases in fuel oil and energy prices greatly impact food inflation because transportation costs make up a substantial part of the total cost of food production and supplies. In Pakistan, food supply chains are disorganized and vulnerable to seasonal variations. This results in frequent increases in the cost at every stage, with a negative impact on the price.

It is a well-known fact that the prices of food items are not demand-elastic like the prices of non-food items. In these circumstances, the government needs to move quickly to tackle food inflation. To this end, steps should be taken to achieve a substantial increase in food crop yields and their guaranteed availability in the markets. The potential in this regard is immense and must be fully exploited. A prime need in this connection is to restrict export of food items to keep their prices under control.

There is also a need for effective coordination between provincial and federal governments to keep a check on food inflation. Controlling the prices of food items is primarily the job of provincial and district governments which should be made to play their due role in this regard. Price control committees should be set up at district and tehsil levels to monitor price movements and trends on a daily basis.

Rupee devaluation is another important factor in controlling inflation, especially food inflation. During the last twelve months, imported inflation has played havoc with the market. The rupee has so far lost 40pc of its value against the US dollar. To preserve and increase the rupee’s parity value, the government must adopt appropriate policies to speed up economic growth and thus increase the flow of goods and services in the economy.