NationalVOLUME 15 ISSUE # 14

Unbridled inflation

Prime Minister Imran Khan has directed officials to find an out-of-the-box solution to bring down skyrocketing prices in the country. One wonders he is not aware of the basic problem behind inflation. He does not need an innovative method to do it, he only needs to reduce the value of the dollar and electricity and gas tariffs to provide relief to the common people.

In fact, prices have stabilized to some extent after the dollar rate and electricity and gas tariffs have not risen in few months. Prices have marginally decreased during the week which ended on February 20. The Sensitive Price Indicator (SPI)-based weekly inflation for the combined consumption group decreased by 0.14 percent as compared to the previous week. The SPI for the week was recorded at 130.67 points against 130.85 points registered in the previous week, according to data released by the Pakistan Bureau of Statistics (PBS). During the week, average prices of 13 items registered decrease, while that of nine items increased with the remaining 29 items’ prices unchanged. Prices of the commodities that recorded decrease included tomatoes, eggs, chicken, potatoes, gur, garlic, wheat flour, LPG cylinder (11.67kg), sugar and pulses.

The prices went through the roof after the Pakistan Tehreek-e-Insaf (PTI) government increased power tariff for the fourth time in 11 months. Inflation rose to the highest level in nine years in January this year and the central bank warned that it could rise beyond the target set for the current fiscal year. Inflation rose to 12.7pc year-on-year in January, the highest level in nine years, mainly driven by an increase in prices of food items, according to the Pakistan Bureau of Statistics (PBS).

In a move that further overburdened people, the government approved an increase of 1.75pc 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 2019, 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. It first increased power tariffs in January 2019, 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 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.

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. A recent IMF mission report said that the first half of the fiscal year “had been strong” and that inflation was expected to decline as the shocks caused by sudden depreciation had subsided. It also stated that spending on social and development projects had increased and acknowledged that Pakistan had made considerable progress in advancing reforms and continuing with sound economic policies.

In a bid to control inflation, the government has decided to keep gas and electricity prices unchanged for the next four months till the announcement of the next fiscal budget and tasked the ministries concerned with reducing taxes on utility bills to provide some relief to inflation-hit people. The Utility Stores Corporation (USC) has started purchasing edible oil and ghee from factories in the erstwhile Federally Administered Tribal Areas and Azad Jammu and Kashmir as the factories are exempted from all taxes, so that the USC could sell the products at lower rates to consumers. However, the Utility Stores cannot provide relief to a large number of people, because of their limited number.

The recent steps to control prices are not enough. The government will have to lower electricity and gas prices and the dollar value. Inflation in the last Pakistan Muslim League-Nawaz was between 8 to 9pc, which has almost doubled in the Pakistan Tehreek-i-Insaf (PTI) government. The dollar was trading around Rs124 when Prime Minister Imran Khan took office in August 2018. It has now risen to Rs154. Under the IMF agreement, the government will no longer control the dollar value against the Pakistani rupee. Instead, it will be dealt by the open market. The government will have to devise a mechanism to bring the dollar value to the 2018 level to provide relief to the common people from rising prices. If the dollar value decreases, it will also reduce power and gas tariffs. The government will have to take practical steps to check prices in days and weeks. It will also have to increase tax revenue to spend more on the people. Rising prices have crushed the common people and the government should not test their patience.