A vendor arranges vegetables to attract buyers on Burnes Road on Wednesday.—Fahim Siddiqi/White Star

Counterinflationary policy — thinking beyond imposing price controls

It is important for the government and policymakers to think beyond the tried-tested-failed practices of imposing price controls.
Published July 16, 2022

Inflationary pressure in developing countries usually triggers government interventions such as price controls. Although economic evidence amply shows that price controls, no matter how well intended they are, always end in economic failure, they are still one of the most popular forms of government action to arrest price hikes.

Price controls negate the basic economic principle of market price discovery through the forces of demand and supply by setting an artificial price floor or ceiling which results in market dysfunctionalities (creates excess in case of floor and scarcity in case of ceilings). For this very reason, price controls were abandoned long ago in developed countries. However, most developing countries still use price controls for energy, food and non-food items.

In Pakistan, the situation is no different. Here price floors, price ceilings and price-based subsidies are a common and regular occurrence for a long list of items, including energy, food and non-food products. Currently, district administrations, and sometimes provincial or federal departments, are responsible to determine and notify prices of essential commodities under various provincial laws on a regular basis.

For price determination, a number of methods and formulae are currently in use. For most districts, prices of perishable items i.e. fruits and vegetables, are notified on a daily basis by adding a wholesale and retail margin to the price of commodities determined in the nearest mandi.

Price of pulses, milk, meat and grains are determined by the district price monitoring committees that comprise of representatives of relevant traders, suppliers, manufacturers and consumers, including trade/industry associations.

Meetings of district price monitoring committees are held at regular intervals (usually once a month) to determine and notify retail prices of commodities on the basis of input received from committee members/stakeholders.

Prices of commodities where a government subsidy is involved such as fertilisers, sugar, ghee and flour etc are sometimes determined at the national level, with the involvement of provincial and federal ministries and relevant stakeholders. The prices of these commodities are generally determined by using a cost-based approach or landed cost in case of imported items.

It is interesting to note that there is no uniform or a 'one fit all’ formula at the district, provincial or national level to determine prices of essential items. Different sets of variables are used to determine prices of different commodities or for the same commodity in different districts. Irrespective of the manner and formula used to determine prices, the enforcement of price controls has always remained very difficult and unsustainable.

Prices of essential items are collected and collated on a daily basis, primarily by the Federal Bureau of Statistics (FBS) at the federal level and by relevant provincial departments at provincial level. The data collected is used at different levels, such as the National Price Monitoring Committee in the Ministry of Finance and other concerned federal, provincial and district departments, essentially for the purpose of monitoring and controlling prices of essential items.

It is, however, important to note that most of the time prices of commodities are determined and notified by the district management without considering peculiar features of the supply and demand situation in the district. To put it more precisely, district management while determining the price of a commodity does not take into account the district level supply and demand gap for that particular commodity. This gap is unique for each district and mainly depends on whether a commodity is produced in a given district or is supplied from an outside the district source.

In fact, updated and authentic data on district-wise supply and demand situation for each essential commodity is not available anywhere at the district, provincial or federal level and perhaps absence of this crucial data is one of the fundamental obstacles in planning, designing and implementing non-price market interventions at these levels.

It is important to understand that in a free market, price is essentially a signal showing relative scarcity/excess of a product or service for the producers and consumers. Simply introducing a mechanism to regularly monitor district-wise supply and demand patterns can very effectively predict potential price changes in the relevant district or districts. The potential price change can then be managed with various interventions. For example, if the pattern of a potential supply shortage is observed for a district or in a number of districts, immediate supply sourcing/diversion from districts with oversupply can dilute the impact on price in the short run and for longer run production or storage of such commodities at the district level can be enhanced.

Similarly, in districts with oversupply processing, storage and transportation of commodity to other districts could be incentivised. Since there is no prohibition on inter-district and inter-provincial movement of goods or services, monitoring of district-wise supply and demand and signaling appropriate interventions can take place through a web-based portal at the federal level with data accessible to all relevant stakeholders at the provincial and district levels. Availability and dissemination of such data for public use will not only help government interventions but will also create business opportunities for the private sector having the ability to act on high demand and short supply situations.

In this regard, district management can collaborate with FBS or relevant provincial department officials to i) conduct a one-time mapping exercise of supply and demand of essential commodities in their district and ii) share periodic data on changes in supply and demand levels in the district. This additional data can be collected without deploying more human resources and by using technology such as a mobile app. A monitoring system can be introduced for few essential items, such as wheat flour, sugar, pulses, chicken, milk and rice and later on other items can be added to the list as the need arises.

District-wise monitoring and interventions driven by supply and demand forces can bring multiple benefits apart from preventing market dysfunctionalities that result from continuous imposition of price controls, such as i) enabling proper planning and resource allocation at federal, provincial and district levels, ii) unburdening the exchequer from the cost of enforcing price controls, iii) encouraging investment in the retail and wholesale sector, and iv) encouraging investment in the food processing and storage sectors to name a few.

In the current streak of high inflation and a tense economic situation, it is important for the government and policymakers to think beyond the tried-tested-failed practices of imposing price controls. Ideally, governments should refrain from intervening in the market. Income supplementing direct unconditional cash transfers for the most vulnerable segments is a step in the right direction that should gradually replace all other subsidies.

The writer is former member/Acting Chairperson of the Competition Commission of Pakistan and an expert in the economics for competition law. She can be reached at shaistagilani@gmail.com.