Wednesday October 04, 2023

Price control challenge

June 08, 2023

LAHORE: Addressing the challenge of keeping prices of essential goods reasonable in economies like Pakistan that face regular currency depreciation and high sales taxes requires a multi-faceted approach. Short-term solutions must be accompanied with medium and long-term strategies.

Government must immediately introduce targeted subsidies to offset the impact of currency depreciation and high taxes on essential goods. These subsidies can be directed towards vulnerable populations, such as low-income individuals or families, to ensure their access to affordable essential goods.

The state must consider providing tax exemptions or reducing sales taxes on essential goods. This can help alleviate the burden on consumers and make these goods more affordable. Governments can identify specific essential items and grant them preferential tax treatment to ensure their affordability and accessibility. Take for instance edible oil that is subjected to both import duty and sales tax on duty paid value of the invoice.

The point would be clear if we calculate the landed value of edible oil valued say at $1,000 per tonne on different dollar values against the rupee at hypothetical import duty of 10 percent and sales tax of 15 percent. At Rs176 per dollar, the landed cost was 176,000 plus 17,600 import duty plus around 29,000 sales tax. The total landed cost came to 222,000 per tonne.

Now, if the same oil is imported at the current dollar rate of Rs286 then the price would be Rs286,000 (inevitable cost because of devaluation). The import duty would increase to Rs28,600 that is a Rs11,000 increase in import duty for the same quantity of edible oil.

The sales tax on duty paid value would be Rs45,300 which is Rs16,300 higher than sales tax on the same quantity of edible oil. If the government fixed the duties and sales tax to the level when dollar was equivalent to Rs176, edible oil would be Rs27 per kg cheaper for consumers. The revenue loss could be covered by increasing duties on non-essential and luxury items.In the medium and long-term, the state should reduce reliance on imports by promoting domestic production of essential goods. This can be achieved through targeted industrial policies, investment in infrastructure, and supporting small and medium-sized enterprises (SMEs) to foster local manufacturing capabilities. By increasing domestic production, the reliance on imports is reduced, mitigating the impact of currency depreciation and import duties.

The other measure is to implement monetary policies to stabilise the currency, reducing the frequency and severity of depreciation. Central banks can intervene in the foreign exchange market, manage interest rates, and maintain adequate foreign exchange reserves to stabilise the currency’s value. Stable currencies provide a more predictable environment for pricing essential goods.

The planners’ should encourage competition in the market by removing barriers to entry for new businesses. Increased competition can lead to lower prices as businesses strive to attract customers. This can be achieved through regulatory reforms, reducing licensing requirements, and creating a level playing field for all market participants. The consumers must be educated about their rights and promote awareness of fair pricing practices. This can empower consumers to make informed decisions and exert pressure on suppliers to keep prices reasonable. Implementing price controls or regulations on essential goods to prevent excessive price increases is a solution, but it has failed in Pakistan.

Reducing reliance on a few specific industries or imports and by diversifying the economy, and encouraging a balanced trade portfolio, the vulnerability to currency depreciation and the impact of import duties can be curtailed.

Cooperation with international organizations and neighboring countries is essential to address currency stability and trade-related issues. Collaborative efforts can help stabilize currencies, negotiate trade agreements, and improve market access, thereby promoting affordability and reducing price volatility.