Inflation and PTI’s responsibility

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VIAAnjum Ibrahim
SOURCEBusiness Recorder
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The federal cabinet decided on 7 February 2018 to constitute a committee headed by Minister of Defense Pervez Khattak, to develop a proper system for stabilization of prices of essential commodities and to check profiteering.

Perhaps the motive behind giving this task to Khattak was his extremely limited work load; be that as it may this particular assignment reflects a complete lack of understanding of the situation on two counts. First, the Ministry of Finance is a major contributor to inflation through its decisions on how much utility rates may be allowed to rise, how much to borrow and from where as well as the budget deficit which is why previous administrations tasked the Minister of Finance to keep inflation in check. And second, failing to realize that perfect competition conditions rarely prevail with respect to most commodities in Pakistan due to: (i) proliferation of cartels and (ii) variation in price and quality from one vendor to another. It is therefore impossible to monitor and enforce prices other than in designated bazaars as was evident during previous administrations however to date the Khan administration continues to refuse to learn lessons from the past dismissing them as the output of corrupt leadership.

Officials of the Pakistan Bureau of Statistics (PBS), like their counterparts in other ministries/departments, have provided a feel good factor to the Pakistan Tehrik-i-Insaaf government (PTI) by pointing out that during the first six months of Pakistan Muslim League-Nawaz government prices of daily use commodities registered a 6.5 percent increase, whereas in the first six months of the PTI government only 1.4 percent increase was witnessed. After carefully examining December 2013 and January 2019 data uploaded on the PBS website and subsequent to a question put to the PBS officials by Business Recorder as to how this calculation was made, a question which was not answered, one is compelled to conclude that this claim is not backed by supporting data and is merely a reflection of the PBS officials currying favour with the Khan administration.

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However even if data had supported this claim by PBS the Minister of Finance should have pointed out two mitigating factors favouring the government in 2019 as opposed to the 2013 government while making a comparison: (i) nominal oil price was around 91 dollars in December 2013 while the price was around 61 dollars per barrel in February 2019; and (ii) unlike the PTI, the PML-N government went on an International Monetary Fund (IMF) programme in September 2013 (three months after it took over power) which implied accepting the Fund’s pre-programme conditions with an inflationary impact.

Also Read: As core inflation stays high, SBP hikes interest rate

PBS data indicates that Pakistan’s inflation rate rose to 7.2 percent year on year basis in January 2019 compared to 6.2 percent in December 2018 and 4.4 percent in January 2018 – core inflation, non-food non-energy, prices rose by 8.7 percent (compared to 5.2 percent in January 2018) and core inflation rose by 7.7 percent in January 2019 compared to 4.6 percent in January 2018 as per the PBS. The IMF website quoting the World Economic Outlook October 2018 cites inflation at 7.5 percent for Pakistan, the highest in the South Asian region with India at 4.9 percent, Sri Lanka at 4.8 percent, Nepal at 5 percent, Bhutan at 4.9 percent, Bangladesh at 6.1 percent and Afghanistan at 4 percent. Other countries with significantly worse inflation rate than Pakistan’s include Turkey at 16.7 percent Turkmenistan at 8.2 percent while sanction-hit Iran’s rate is 34.1 percent. Other countries with worse inflation rates than ours are Ethiopia, Libya, Nigeria and Sudan.

Why is Pakistan’s inflation rate the highest in the region and compares well only with countries that belong to highly indebted poor countries or, like Iran, are hit by sanctions? Those who may point to our yawning current account deficit, estimated at over 19 billion dollars at present, as the major reason for a rise in inflation need reminding that the Khan-led administration has already procured loans of up to 6 billion dollars from Saudi Arabia and the United Arab Emirates for one year with a possibility of negotiating a deferment in the repayment period (as well as a little over 6 billion dollar deferred oil payment facility from Saudi Arabia and the UAE). Reports also indicate that Pakistan is likely to procure 2.5 billion dollars as balance of payment support from China though at commercial rates. In other words, total loans procured/being negotiated to date are in excess of 16 billion dollars and hence the current account deficit should not be an issue as already claimed by Finance Minister Asad Umer.

However the issue of the budget deficit is rising every month, a key element when undertaking macroeconomic stabilization policies. Revenue is not likely to exceed 4.1 trillion rupees as per the Federal Board of Revenue (FBR) while expenditure estimates remain high (with Asad Umer inexplicably silent on total expenditure for the year in spite of presenting two amended finance bills) accounting for a projected unsustainable deficit of 6 percent of Gross Domestic Product (though estimates indicate it will be 1 to 1.5 percent higher than this).

The Prime Minister reckons that the rate of inflation has risen due to the rupee depreciation. This does not account for the significant rise in food prices from December 2018 to January 2019: tomatoes rose by 27.56 percent, fresh fruits by 3.50 percent, moong by 2.73 percent, gur by 2.26 percent, maash by 1.34 percent. The government is directly responsible for the increase in January 2019 relative to December 2018 of electricity tariff by 8.48 percent, gas by 85.31 percent, motor fuel by 18.05 percent, transport by 15.22 percent, water supplies by 12.94 percent and construction inputs by 12.55 percent.

What can however account for a rise in inflation is the 4.3 times rise in federal government borrowing from the State Bank of Pakistan (SBP) with 3.77 trillion rupees borrowed from SBP during the ongoing fiscal year indicative of a reliance on a source of financing that is discouraged by economists as well as multilaterals as it generates too much money into the economy thereby fuelling inflation. This is one of the root causes of inflation that is attributable to a decision taken by the current administration. Economic Surveys reveal that borrowing from SBP through purchase of market related treasury bills (issued in tenors of 3 months introduced in 1997, 6 months introduced in 1990 and 12 months introduced in 1997) was 1.759 trillion rupees in 2012, rose to 2.85 trillion rupees in 2014, provisionally estimated at 2.55 trillion rupees in 2018 and with five months still left for the end of the 2019 fiscal year has already reached 3.7 trillion rupees.

SBP recently indicated that in response to the rise in core inflation and fiscal deficit it raised its benchmark rate by 25 basis points to 10.25 percent, a decision designed to mop up excess liquidity in the country to reduce inflationary pressures. The SBP stated that the decision to raise rates was taken “as the country gets closer to meeting the IMF condition for demand compression.” What is however disturbing is that SBP’s statement was made at around the same time that the PTI government announced its second finance amendment bill envisaging incentives to increase credit to productive sectors and the poor/vulnerable as a means to fuel growth. Additionally, the Prime Minister reportedly remains opposed to procuring a bailout package from the IMF and informed sources state that no definitive decision has been taken in this regard though clearly the Minister of Finance and Governor SBP support going on a Fund programme.

Raising tariffs (on electricity and gas) was required to meet the untenable rising costs of these sectors (especially as claims of improved governance are not yet evident), failing to massively reduce current expenditure by urging all sectors to sacrifice in the short term and instead mollycoddling the wealthy productive sectors through incentive packages with negative revenue implications unfortunately reflects a disturbing fact: macroeconomic stabilization has been pushed to the back burner – a decision that would have further severe repercussions on the rate of inflation and on the quality of life of the poor and vulnerable that the PTI claims it is protecting.

(This news/article originally appeared in Business Recorder on February 11th, 2019)

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