The right path?

By Editorial Board
October 02, 2022

Finance Minister Ishaq Dar has arrived on the scene with a big bang. Between his nomination as finance minister and taking oath of the said office, the rupee rose against the greenback by around Rs12 to a dollar. On Friday, he used the limelight provided by his maiden media conference at Islamabad to announce lowering pump prices for motor spirit, light diesel, high-speed diesel, and kerosene oil by around 5 per cent. Separately, a cut of about 5 per cent in the price of LPG (Liquified Petroleum Gas) has been announced. The Pakistan Bureau of Statistics (PBS) has published its inflation data for the month of September as part of a monthly review on price indices – and it would have us believe the current shockwave of inflation peaked in August. Consumer Price Index (CPI) based inflation rose to 23.2 per cent on a year-on-year basis in September, compared with a 27.3 per cent surge in the previous month, registering a 1.2 per cent month-on-month decrease. The Sensitive Price Index (SPI) registered a YoY increase of 28.6 per cent this month, compared with 34.0 per cent the previous month, showing a 1.4 per cent MoM decrease. The Wholesale Price Index (WPI) showed a YoY increase of 38.9 per cent in September, down 2.3 per cent from the previous month’s 41.2 per cent.

These are all glad tidings for a nation grunting under the staggering burden of historic inflation and freshly pummelling by an epic natural disaster. In particular, the easing of energy prices should be a welcome move as it should go some way in dampening the roaring inflation. However, the government’s motivation in instituting these measures at this precise moment must be called out as suspect: some functionaries of the PML-N-led government are eager to spin these developments as achievements of the new finance minister, who has barely taken the reins of the Ministry. Also, let it be put on record that the inflation numbers published by the PBS are too good to be true. Some clues are at once apparent after a cursory look at the data. For instance, the price of a 20kg wheat flour bag has been quoted at Rs1,095 in Islamabad, Rs2,100 in Karachi, Rs1,247 in Peshawar. This is clearly an error on the side of a lower CPI number because wheat flour is retailing at Rs2,200/bag in Islamabad. Likewise, the data used shows a 31.4 per cent decrease in September in “Electricity Charges upto 50 Units” from the August value. The impact on other consumers – which inevitably would be in the other direction – has conveniently been omitted. A more rigorous look at the data may well unearth other such omissions or commissions contributing to a sweetening of the final numbers. Is the government trying too hard to signal a pivot to better times? Is it trying to lower the markets’ inflation expectations? Whatever the reason, the numbers seem anomalous, in particular in the wake of the continuing surge in commodity prices following the floods that wiped away food stores and crops and inundated large swathes of farm lands and infrastructure in the country’s breadbasket.

Returning to the energy prices, passing the impact of falling international oil prices to the consumer looks like a step in the right direction. The sales tax zero-rating of fossil fuels has been maintained, while the rollout of the Petroleum Development Levy (PDL) has been kept frozen. The best part is that these decisions seem to have been taken in close coordination with the IMF. However, it may be useful to remember that the ultimate responsibility for these decisions and how they play out rests with the government, not the IMF. Nobody knows this better than Dar, a veteran of economic management under tough circumstances and IMF programmes seen through to successful closure. But here he has apparently said no to billions of rupees in revenue while he heads a treasury in dire need of fiscal space for development and reconstruction. Our only concern is that he could be assigning too much weightage to the political component of his role to the detriment of its economic component. If Dar intends to use the opportunity created by these glad tidings – buttressed by inflation numbers that look too good to be true – to pivot towards lower interest rate and higher growth, this may be a risky gambit because any movement in that direction will certainly bring the twin deficits back, putting pressure on our already flimsy forex reserves and putting the rupee in a tailspin all over again. Such a course of action is neither tenable nor sustainable for a country dependent on the world’s goodwill, especially given that our economic outlook rests squarely on the continued availability of adequate external financing under challenging domestic and global economic and political conditions. The jury is therefore out on whether the new finance minister is moving the economy in the right direction. It is up to Mr Dar to make it seem right in the coming months and weeks.