Inflationary pressures to persist in FY23

July 03, 2022

ISLAMABAD: Inflationary pressures will persist in the current fiscal year 2022-23 as the Consumer Price Index inflation spiked to a frightening 21.34 percent for June, despite “perpetual...

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ISLAMABAD: Inflationary pressures will persist in the current fiscal year 2022-23 as the Consumer Price Index (CPI) inflation spiked to a frightening 21.34 percent for June, despite “perpetual manipulation” of pricing data of wheat flour prices in Punjab and Khyber Pakhtunkhwa.

The build-up in inflationary pressures will persist because the Wholesale Price Index (WPI) based inflation jumped to 38.9 percent for June 2022.

So inflation will further go up when the prices will translate from wholesale to retail stage after a time lag of one or two months.

Secondly, the revised budget documents for 2022-23 show that the government increased the petroleum levy target from Rs750 billion to Rs855 billion for the current fiscal year.

Amid rising inflation, there is no justification to jack up petroleum levy up to Rs50/litre. The government had already imposed Rs10/litre petroleum levy on petrol and Rs5/litre on diesel and other products with effect from July 1, 2022. The government is going to collect Rs15 billion on a monthly basis at this rate of petroleum levy.

If there is no alleged manipulation with pricing data, the CPI-based inflation might go up to 23 or 24 percent for June 2022.

Experts have been continuously raising some interesting observations regarding the calculation of pricing data by Pakistan Bureau of Statistics (PBS), but have so far failed to grab the attention of those that matter.

The wheat flour price on average showed at over Rs1,200 per 20kg/bag.

The official data showed the price of wheat flour bag hovers around Rs980/20kg bag in Peshawar as the minimum price and within the vicinity of the same city its maximum price touched over Rs1,600/bag. Is such a huge gap in the price of an item within one city possible?

Interestingly, the price of a 10kg wheat flour bag in Gujranwala is Rs700, higher than Rs682/10kg in Bannu and Hyderabad. When the price of a 20kg wheat flour bag is Rs980 in the whole of Punjab then how the price of a 10 kg wheat flour bag can be Rs700/bag in Khyber Pakthunkhwa.

It clearly shows something is wrong with the price data. The minimum price of a 20kg wheat flour bag is Rs980, while its maximum is over Rs16,00/bag. This huge variation of price within the city of Peshawar warrants an investigation. In Karachi, the price of a 20kg wheat flour bag is Rs1,500 to Rs1700. There is a differential of Rs600 to Rs720 per bag in Karachi and Gujranwala.

However, experts believe the import-induced inflation will continue to grow higher in the short to medium term. It will not slow down until the productivity and efficiency of the neglected agriculture sector is improved drastically.

Dr Khaqan Najeeb former adviser Ministry of Finance said June 2022 data for inflation surprised on the upside, especially the SPI at 32 percent and WPI at 39 percent. “Managing inflation beyond monetary tightening is a key challenge for the government to give relief to the people. In the short run it is important to do vigilant supply-side monitoring of key food items to manage food inflation,” Dr Najeeb said.

He stressed the government must also ensure supply of cheaper fuels, ensure there was no undervaluation of the rupee, and limit the rate of monetary expansion.

“Serious work is required to upgrade the productive capacity of industry and agriculture sectors if the country has to get a grip on inflation in the medium term, while same is needed for import substitution in food items, replacement of imported coal with Thar coal by upgrading power existing plants, and gasification of coal to substitute coal for gas. It is crucial to move to targeted subsidies to ensure the consumption pattern is redesigned.”

Dr Najeeb explained that in the power sector the country needed to seriously move to a competitive market model. The government’s intervention must be limited to improve the functioning of markets, he said.

“We must realise that SOEs (state-owned enterprises) are a drag on the economy and partly cause the high tariff due to their inefficiencies resulting in high inflation. But privatisation or restructuring both have been slow and ineffective.”

“If serious steps are not taken then these issues would keep the country in an inflation spiral but hope for such serious measures remains limited at best,” he concluded.

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