NationalVOLUME 14 ISSUE # 24

The rising threat of inflation

Rising inflation is the name of the game now. According to the latest figures released by the Pakistan Bureau of Statistics (PBS), the average rate of inflation during July-June, 2018-19, in the country was as high as 7.37 percent compared to 3.92 percent in the previous year and 4.16 percent a year earlier.


The CPI also soared by 8.89 percent in June 2019, over June 2018, as compared to 5.21 percent a year earlier and 3.93 percent in June 2017, over June 2016. The Sensitive Price Index (SPI) and Wholesale Price Index (WPI) also posted hefty increases of 10.65 percent and 12.69 percent as compared to the rise of 1.92 percent and 7.64 percent, respectively, in the previous year. The main group of commodities and services contributing to the rise in the CPI in June 2019, over the corresponding month of the last year comprised food and non-alcoholic beverages (+7.52 percent), housing, water, electricity, gas and fuels (+9.99 percent), furnishing and household equipment (+9.26 percent), health (+8.26 percent), transport (+14.96 percent) and communication (+8.82 percent).


Inflation is a form of indirect tax which hits the poor more. The continuous erosion of the purchase power of the rupee by such a high magnitude of inflation specially affects the ordinary people of the country. The average household spends most of their incomes on food and face dwindling prospects of employment due to a lower growth rate of the economy. A higher rate of inflation also depresses the rate of saving and investment in the country and retards economic growth.


Since the rate of inflation is much higher in Pakistan as compared to its trading partners and competitors, authorities concerned would be obliged to depreciate the local currency further in order to maintain competitiveness in the international market. Besides, monetary policy has to be tightened further to contain the rate of inflation and support the balance of payments position of the country. Any increase in the policy rate due to spiraling inflation would also result in higher lending rates, curtailment in private sector credit, slower growth rate and higher debt servicing by the government, putting more pressure on the fiscal position which is not comfortable.


The outlook for inflation during FY20 is dim and the CPI is all set to increase by 13 percent on an average basis compared to 7.34 percent in 2018-19 and around 4.0 percent in the two years before FY19. This estimate is based on the fact that fiscal deficit of the country is likely to be over 7 percent during the current year and the growth rate of the economy, which could partly neutralize the impact of the expansionary fiscal policy, is projected to decline to as low as nearly 2.0 percent due to the stabilisation policies envisaged under the EFF programme approved by the IMF.


During FY20, the most important challenge to inflation would come from the taxation measures announced in the budget. Even though the government has avoided taking indiscriminatory measures like an increase in the GST rate, which would have badly affected inflation, there are still a number of tax measures that would affect prices of key consumer items such as sugar, cement, cigarettes, gas, electricity and others.


One way to control inflationary pressures in the economy is to tighten the monetary policy. It may be added here that considerable adjustment has already been made in the policy rate which has now been set at 13.25pc. To see this point, consider first the definition of the real interest which really is the target rate. Simply put, it is the nominal interest minus inflation. But a variety of other measures are also available for containing inflation.


According to experts, fiscal policy needs to be made more restrictive as a remedial measure. In the situation, the government will do well to keep a sharp eye on price movements and take appropriate measures in time so that the inflationary pressures are contained within reasonable limits and the vulnerable sections of society are protected. Our market is wayward which requires that proper administrative measures are initiated to control hoarding, black marketing and price sharking. The key to price stability is to ensure the continuing supplies of items in the food basket, particularly vegetables and fruits, besides grains and lentils.