Recent data on inflation trends in Pakistan raises concerns about its impact on various income groups and the effectiveness of economic policies in addressing underlying issues. Despite efforts by the government and international institutions, challenges persist, prompting a closer examination of policy approaches and their implications for the economy.

The government anticipates a further decrease in the inflation rate, with projections suggesting it will range between 18.5 and 19.5pc in April 2024. According to the finance ministry’s monthly update and outlook report for April, this projection is attributed to favorable factors such as the base effect from the previous year and enhancements in the domestic supply chain of essential items. The government is actively pursuing strict administrative measures to combat inflation, despite the challenge posed by rising crude oil prices in the international market, which have led to an increase in domestic petrol prices. However, the government’s efforts to reduce wheat flour prices and implement administrative measures are expected to mitigate the impact of rising petroleum prices.

Looking ahead, there are expectations of a gradual easing in inflation to 17.5-18.5 percent by May 2024. Additionally, the Sensitive Price Index for the week ending 25 April 2024, which comprises 51 essential items collected from 50 markets in 17 cities across the country, decreased by 1.10 percent, with a year-on-year increase of 26.94 percent.

However, experts have repeatedly highlighted three concerning observations regarding data collection by the Pakistan Bureau of Statistics (PBS) that require urgent attention. Firstly, utility tariffs considered are the lowest rates, subsidized at taxpayers’ expense, rather than the average, which would more accurately reflect their impact on inflation. Secondly, during periods of high inflation and significant political pressure to understate it, PBS relies on prevalent prices at Utility Stores Corporation, which are subsidized but may not reflect market demand due to poor quality. For instance, wheat available at cheap rates at USC last fiscal year was unfit for human consumption. Finally, any attempt to understate the inflation rate does not contribute to a feel-good factor among the general public, as price increases from one week to the next often exceed any increase in disposable income during the same period.

Nevertheless, despite the decline, the Sensitive Price Index (SPI) dropped from 28.54 percent for the week ending 18 April 2024 to 26.94 percent for the week ending 25 April—a decrease of 1.6 percent, although according to the Pakistan Bureau of Statistics (PBS), the decline was recorded at 1.10 percent.

The income group most affected by the inflation rise was those earning between Rs22,889 and Rs29,517. Their inflation rate increased from 32.49 percent for the week ending 18 April to 30.74 percent for the week ending 25 April. Similarly, the income group earning between Rs29,518 and Rs44,175 experienced a rise in inflation from 29.95 percent to 28.23 percent during the same period. Ironically, those earning above Rs44,175 saw a positive change, with their inflation rate decreasing from 25.98 percent to 24.53 percent for the week ending 25 April. This discrepancy raises concerns about the fairness of the inflation impact across income brackets.

During the World Economic Forum in Riyadh, the Managing Director of the International Monetary Fund (IMF) acknowledged inflation as an issue for Pakistan. However, there is disappointment that the IMF and its team focused solely on certain factors contributing to inflation in the staff-level agreement for the Stand-By Arrangement’s second and final review. These factors require reconsideration for the conditions of the next fiscal year’s program.

The IMF-sponsored administrative measures aimed at achieving full cost recovery in utility sectors, while economically sound, have resulted in rate increases rather than improving sectoral efficiency. Additionally, reliance on raising existing taxes, including the regressive petroleum levy, instead of reforming the inequitable tax structure, has led to across-the-board price hikes. Furthermore, increased government borrowing from the domestic sector, injected back into the economy to fund non-development current expenditures and widen the fiscal deficit, is contributing to inflation.

The IMF’s focus on raising the discount rate to curb inflation, although appropriate for Western economies, lacks established linkage with inflation in Pakistan. High discount rates are crowding out private sector borrowing, negatively impacting output and fueling smuggling across porous borders, with serious implications for the external value of the rupee and imported inflation.

In conclusion, the data highlights the complexities surrounding inflation in Pakistan and the need for a comprehensive policy response. While efforts to address inflation are underway, there are concerns about the fairness of its impact across income brackets and the effectiveness of certain policy measures. Moving forward, policymakers must consider a holistic approach that addresses underlying structural issues while ensuring equitable distribution of the burden. Only through such measures can Pakistan achieve sustainable economic stability and growth.

The recent analysis of inflation trends in Pakistan reveals several noteworthy findings. Firstly, there has been a decline in the Sensitive Price Index (SPI) from 28.54 percent to 26.94 percent between the weeks ending April 18 and April 25, although the extent of the decline differs slightly according to the Pakistan Bureau of Statistics (PBS). This decline suggests some alleviation of inflationary pressures, albeit modest.

Secondly, the analysis indicates that certain income groups have been disproportionately affected by the rise in inflation. This disparity underscores the need for policies that consider the varying impacts of inflation across income brackets to ensure fairness and equity. Thirdly, the commentary on the International Monetary Fund’s (IMF) role in addressing inflation highlights some important considerations. While the IMF’s focus on raising the discount rate may be appropriate for advanced economies, its effectiveness in Pakistan’s context is questionable, given the lack of established linkage between inflation and the discount rate. Moreover, reliance on administrative measures and regressive taxation may exacerbate inflationary pressures and socioeconomic inequalities.

Overall, the analysis underscores the multifaceted nature of inflation in Pakistan and the complexity of addressing it through policy interventions. Moving forward, policymakers must adopt a nuanced approach that considers the diverse impacts of inflation, addresses structural issues in the economy, and ensures equitable distribution of the burden among different income groups. Only through such comprehensive measures can Pakistan effectively mitigate inflationary pressures and promote sustainable economic development.