Inflation, where will you move?

Published August 7, 2023
A man selling vegetables waits for customers at his makeshift stall at the Empress Market in Karachi. — Reuters/File
A man selling vegetables waits for customers at his makeshift stall at the Empress Market in Karachi. — Reuters/File

Electricity prices have gone up — once again. And petrol prices are up by about Rs20 per litre. There are chances of a rise in gas tariffs as well. And petrol and electricity prices, too, will continue to rise for some time. The reason is international oil prices are on the rise — and Pakistan has promised the International Monetary Fund to keep increasing petroleum development levy, end remaining subsidies on energy products and reduce the energy sector’s circular debts.

Inflation is bound to remain elevated, notwithstanding its easing in July. Yearly average consumer inflation in Pakistan eased to 28.3 per cent from 29.4pc in June, according to the Pakistan Bureau of Statistics (PBS). Food inflation is still much higher than general inflation — 40.2pc and 41.3pc, respectively, in urban and rural areas.

The State Bank of Pakistan (SBP) recently left its key policy rate unchanged at 22pc. Its latest monetary policy statement said that consumer inflation in FY24 ending in June 2024 is expected to be 20pc-24pc, down from 29.2pc in FY23. The central bank expects that the impact of monetary tightening undertaken in FY23 will take more time to show its full effect. It says consumer inflation will decline in the second half of FY24 (Jan-June 2024).

The rising trend in domestic energy prices is expected to continue at least through March 2024, when the current International Monetary Fund’s nine-month Standby Arrangement will end. And how long the country will experience political uncertainty is a major unknown as no one can say for sure if the next general elections due in October-November will be held on time — and in what kind of environment. So, consumer inflation may exceed the SBP’s optimistic projection.

The central bank expects that the impact of monetary tightening undertaken in FY23 will take more time to show its full effect

SBP’s projection may come true if aggregate demand slumps and the economy grows below the targeted 3.5pc, making life more miserable for people and businesses.

And in case the economic growth target is met, and inflation remains within the SBP’s projection band, that would be partly a product of high-base effect (inflation in FY23 at 29.2pc) and central bank’s interest rate tightening (SBP raised its policy rate from 13.75pc to 22pc in six instalments during FY23).

In FY23, the economy grew just 0.3pc, and the full fiscal year inflation averaged at 29.2pc; year-on-year inflation readings stood as high as 35.4pc in March, 36.4pc in April and 38pc in May 2023. Sustaining partial easing in June and July remains a big challenge.

As for food inflation, the worst is still not over. Since February this year, food inflation has remained above 40pc in urban areas, and year-on-year monthly readings ranged between 40.2pc and 48.1pc. In rural areas, it has remained above 40pc since January, and annualised monthly readings have ranged between 41.3pc and 50.2pc.

Increases in fuel oil and energy prices affects food inflation quickly, often quicker than non-food inflation. The reason is that transportation costs make up a substantial part of the total cost of food production and supplies. Besides, food supply chains are more broken and run by the informal sector than supply chains of non-food items.

Broken supply chains lead to an undue increases in the cost at every stage, and those controlling food industry supply chains in the informal sector display more unruly and stubborn behaviours when it comes to passing on the impact of cost increase from one stage to another.

Unlike general inflation, one cannot even hope for easing through the high-base effect. Prices of food items are not demand-elastic like the prices of non-food items.

A couple of things can help tackle food inflation effectively. The most important is a net substantial increase in food crop yields and their guaranteed availability in local markets. That is not possible in our case—not at least in the short term. Yield gaps of Pakistani food crops are high, and policymakers don’t have a magic wand to cover them within this year.

A few top politicians directly/indirectly control staple food crops like wheat and sugarcane as well as wheat flour and sugar mills. That is why Pakistanis see wheat/wheat flour and sugar crises year after year. And that is why surplus production of any food crop cannot guarantee enough availability in domestic markets, even in cases where the government restricts exports.

Effective coordination between provincial and federal governments can make it easier to keep a check on food inflation, but that, too, remains missing.

Controlling the prices of food items administratively is primarily the job of provincial/district governments. Provincial governments take little interest in it — and we all know that local bodies elections are not held for years in most cities, and even when they are held, and district governments come into being, they do not function properly for a variety of reasons, mostly political and related to the whims of “the establishment.”

Whether general inflation remains within the SBP’s projected range of 20pc-22pc during this fiscal year and whether back-breaking food inflation may show some respite also depends partly on the rupee’s health. During the last year, we saw imported inflation making general inflation stubborn and contributing to quick buildups in food inflation as the rupee lost 40pc value to the US dollar.

With the recent lifting of import restrictions, the rupee is bound to become weaker in the coming months, making the task of keeping general and food inflation under check more challenging. For the time being, the trade deficit is apparently under control. In July, the goods’ trade deficit fell to $1.61bn, down from $1.86bn in June, according to the latest PBS report.

Published in Dawn, The Business and Finance Weekly, August 7th, 2023

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