The stubborn inflation

Published October 25, 2021

Economists say there are multiple causes of inflation. A major underlying source in Pakistan’s case may be traced to what economists describe as ’structural inflation.’ This happens when prices rise in an expanding economy because the supply can’t keep up with rising demand due to structural inflexibilities.

That leads to a debt-financed surge in imports and import-related inflation as international prices rise and the national currency depreciates sharply. And as the rupee value falls to record lows, the International Monetary Fund (IMF) reportedly now expects the value of imports to be reduced by 10.5 per cent in 2021-22, which, according to an analyst, will take the imports quantum lower than 2018-19.

In the first quarter of the current fiscal year, Pakistan Bureau of Statistics data showed that the import of petroleum products went up by 93.21pc in value and 10.80pc in quantity. Crude oil imports rose 81.15pc in value and dipped 2.35pc in quantity. The country’s import bill surged by over 97pc to $4.59 billion from $2.32b.

Responding to growing public criticism against the recent major hike in petroleum prices, Federal Minister for Information Fawad Hussain Chaudhry, on October 17, said petrol prices have suddenly jumped from $35 to $85 per barrel and it was impossible for the economy to bear the increase. He argued that the whole country could not be run on subsidies, adding that if the international oil and gas prices go up, Pakistan will have to readjust its rate.

Currently, the government raises more tax revenue from inflation of prices than economic activities

To quote Chairman Businessmen Group Zubair Motiwala, the petrol and diesel prices peaked at Rs87 and Rs65 per litre during the historically highest ever international crude price of $147.27 per barrel in July 2008. Now when it was around $85, the petrol price has been raised to a whopping Rs137.79 per litre — something which, he said, was beyond his understanding.

Comparing international and domestic prices of essential commodities, Federal Minister for Planning Asad Umar told a press conference on October 18 that the prices in Pakistan were comparatively lower than other countries but conceded that the significant hike had badly impacted the purchasing power of the common man.

He said relief in the overall inflation trend was not imminent over the next three to four months. The PTI government, it may be added here, has been struggling to control inflation over the past three years.

While Mr Motiwala feels that the government does not seem serious about controlling food prices, Fawad Hussain says the increase in income and employment were the best way to counter inflation.

It may be pointed here that an increase in incomes and earnings could translate into more tax collection. Currently, the government raises more tax revenue from inflation of prices than economic activities.

Business sentiments generally reflected the Businessmen Group’s leader’s statement that frequent hikes in petroleum prices, electricity and gas tariff and other utilities in addition to depreciating exchange rates and higher duties on imports stood in sharp contrast to government policy to reduce the cost of doing business.

The federal information minister however argued that industry, agriculture and construction sectors were making historic profits. It was the salaried class that was facing problems. He urged the private sector to increase the salaries of its staff.

Many firms can be hurt by inflation as a result of the surge in the cost of production if they are unable to pass on the higher costs to consumers through higher prices. Inflation can however also provide businesses with pricing power and increase their profit margins. Companies can raise prices in case of a surge in the demand for their goods if the economy enters the recovery phase or is performing well. The consumer goods industry — automobiles, pharmaceutical and food — recorded a 92pc year-on-year surge in profit during April-June 2021.

A segment of businesses holds their stocks of goods, allowing prices to go up to a more favourable level. Then owing to the high inflation rate, the value of market assets/inventories goes up. Asad Umar told a questioner that he was not aware as to how much windfall would be earned by oil companies owing to the recent sharp increase in prices of petroleum products.

Some important remedies listed by economists to combat inflation are: increase in the growth rate of output by developing industrial and agricultural sector; improve the balance of payments; evolve an effective tax system and reduce excessive non-development expenditure.

Asad Umar told the news conference that not only wheat output was the highest ever but maize recorded the highest production and rice output was the second-highest ever. But it should be kept in mind, he added, that the prime minister had decided to increase the wheat price by Rs400 to Rs1,800 per 40 kg to support farmers instead of paying higher prices to growers in other countries.

He, however, announced that the government will slash general sales tax and customs duty by 50pc and abolish 2pc additional custom duty on edible oil to reduce the price by Rs45.50 per kg. The decision would be notified after the return of the prime minister’s advisor Shaukat Tarin from the United States. Mr Umar is the third cabinet minister to announce measures for the reduction of edible oil prices, without actual relief.

Food imports increased by over 38pc in the first quarter of this fiscal year to $2.36bn from $1.71bn during the three months of the last fiscal year. More imports of sugar and wheat are planned for the next few months. The Sensitive Price Index (SPI) shows that prices of essential items have soared by 12.68pc in one year.

Pakistan Agricultural Research Council’s Chairman Ghulam Muhammad Ali laments that the fragile situation of food self-sufficiency in the country. The trade deficit in the food group has stood at around $1-2bn since 2013. Furthermore, productivity and terms of trade also worsened from 2000 onward.

The output of large scale manufacturing (LSM) increased year-on-year 7.3pc in the first two months of the current fiscal year. Despite the LSM’s double-digit growth in August, the overall index stood at 140.8, far lower than the pre-Covid-19 level of 160.4.

Fears are being widely expressed that the positive trends in output growth, already coming under external sector pressure, may receive further setbacks if Pakistan can not get the pace of the IMF stability programme readjusted. Mr Tarin told the Pakistan community in the US that Pakistan had its redlines to protect its interests while assuring the IMF that it would pursue the reforms process for sustainable growth.

Published in Dawn, The Business and Finance Weekly, October 25th, 2021

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