FeaturedNationalVOLUME 17 ISSUE # 24

Uncontrollable prices

Prices continue to skyrocket in the country even in the presence of a new government which has come to power on the promise of providing immediate relief to people. Rates of almost all essentials and daily-use items have increased in the first month of the new coalition government. Though one month is not enough to judge the performance of a government, yet the new setup must have now realised that it was easier to criticise the PTI government than actually take steps to reduce prices.

Rising commodity rates is an international phenomenon, triggered first by the pandemic and then the Russia-Ukraine war. The past government was helpless before the international developments and so is the new government. In fact, the new government will have to hike the power tariff and fuel prices, which would generate a new wave of inflation in the country. The inflation rate in April skyrocketed to 13.4% – the highest since January 2020, putting the new government in a tight spot at a time when it has already committed with the International Monetary Fund to raise fuel prices to revive the stalled $6 billion (now $8 billion) bailout package.

According to the Pakistan Bureau of Statistics, the Consumer Price Index (CPI) measured inflation rate has clocked in at 13.4%. The pace of prices’ increase accelerated due to a surge in the rates of food and transport commodity groups. It was the highest rate since January 2020, when inflation was recorded at 13.7%. The April reading has beaten the expectations of the Ministry of Finance that predicted the 12.5% inflation rate. The fresh reading has also made the decision-making for the new government difficult because of its politically sensitive nature. If it goes for an increase in the prices of petrol and high speed diesel as promised with the IMF to secure a lifeline for the country, it would face a severe backlash. The IMF has asked Pakistan to immediately withdraw subsidy on petrol, which would result in roughly a Rs29.6 per litre increase and also half the diesel subsidy in the first phase, which is currently estimated at over Rs73 per litre.

The CPI-based inflation rate jumped 12.2% in urban areas and 15.1% in villages and towns, according to the PBS. It remained in double digits due to an increase in the prices of food items, which had been taxed by the last government. The pace of food inflation accelerated to 15.6% in cities and 17.7% in villages and towns last month. Core inflation – calculated after excluding food and energy goods – jumped to 9.1% in urban areas and 10.9% in rural areas. Prices of tomatoes were higher by 125% last month compared to a year ago, followed by a 62% increase in the rates of onions, and over 60% of various types of ghee and cooking oil. Prices of pulses increased by over 40%, fruits 30%, meat one-fourth and vegetables by one-fifth. Average inflation during the first ten months (July-April) remained in double digits and shot to over 11% — far higher than the government’s target of 8% and the initial projection made by the SBP. Prices of food items, including pulses, cooking oil and gram flour, have also risen at utility stores across the country as the government’s Ramazan Relief Package has come to an end.

On the other hand, the National Electric Power Regulatory Authority (Nepra) approved increasing the power tariff by 57 paisa per unit for the July-September quarter of the current fiscal year – a move that would put an additional burden of Rs14.3 billion on the consumers. Earlier, it had raised the power tariff by Rs4.8/unit on account of fuel adjustment for February. The country is again facing power outages, because of lack of availability of fuel as well as high losses after low recoveries and increased losses.

To compound the inflation problem, the rupee continues to maintain its record breaking spree, as it surpassed a major barrier of Rs190 against the US dollar for the first time in the inter-bank market mainly owing to political and economic instability in the country. The rupee dropped 0.72% (or Rs1.36) to an all-time low at Rs190.02 against the greenback on May 11, compared to Rs188.66 a dollar on the previous day, according to the central bank. Considering the rupee has declined significantly below its fair value, experts say the government should support the currency by giving a clear timeframe for the next general election and elaborating on the steps it has taken to resume the IMF’s loan programme as soon as possible. The rupee has declined to Rs190 against the US dollar because of concerns on political and economic fronts. Besides, the depletion of foreign exchange reserves has also mounted pressure on the rupee.

According o a think tank, rising prices have become a threat to the new government. An artificial difference between supply and demand of wheat has been engineered by hoarders, which is driving up prices across the country, said the Pakistan Economy Watch (PEW). Pakistan is facing a wheat shortfall of three million tonnes which should be imported without delay to ensure food security as wheat prices in the international market continue to rise due to low supply, high demand and the war between Russia and Ukraine. In fact, flour prices have already increased by over Rs10/kg in the country after wheat supplies to four mills have decreased.

It is feared that the country could face a severe wheat and flour crisis in a few months. As the current wheat harvest is expected to remain low, Pakistan will have to import wheat, which has become dearer in the world market after the Russia-Ukraine war. On the other hand, Pakistan’s foreign exchange reserves are depleting fast. The import of wheat will further put pressure on them and weaken the rupee, which would add to inflation.

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