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May 19, 2019

Devaluation to push masses below poverty line


May 19, 2019

LAHORE: The depreciation of rupee is a forced indirect tax on the poor that nullifies government narrative of protecting low end consumers from taxes. The businesses, including manufacturers and importers recover the devaluation cost from the consumers living on fixed income.

Much has been written on the impact of devaluation. It has been pointed out that devaluation impact on increase in state’s foreign loans in rupee terms would increase the debt burden of the government with subsequent increase in debt servicing.

Also, petroleum products rates would shoot up corresponding to the rate of devaluation.

The cost of imports similarly would enhance in line with the decline in rupee value.

Duties and sales tax would also increase on enhanced dollar value of the imports that would compound the increase in costs. Electricity rates would have to be adjusted in line with the decline in rupee value, because almost 45 percent of the power is generated from imported fuels.

The rates of imported LNG would also increase. The cost of all imported inputs would also increase.

All these impacts have direct impact on the consumers, particularly those living at the edge of poverty. It is a well known fact that majority of the Pakistanis live in transitional state economically.

They periodically move above the poverty line when the economy is growing, but fall back in poverty when the economy is in stress. Even if economy is not under much stress, they feel the pinch whenever the price increases without corresponding increase in their incomes.

As far as the trade and industry is concerned, they may or may not feel the impact of devaluation on their profits. Businessmen pass on the increased cost to the consumers.

For some, the sales might go down as people lose purchasing power. However, there are certain products like food items that have to be consumed so the consumption would not be much affected and so will be the profits of the manufacturers/sellers.

For instance, there would not be much decline in the use of edible oil. The edible oil manufacturers import raw edible oil and process it for local consumers. They will increase the retail price and incorporate the increased cost in their margin.

In the same way, transporters would increase the fares and for shipping goods. Resultantly, the rates of even those items would increase in which there is no imported component.

The increase in power rates would increase the manufacturing cost of even products made from local inputs. Inflation would increase that would force the central bank to increase the policy rates.

This in turn would increase the cost of goods and services. These increases would be cyclic, triggering the increase of the other.

These high prices would impact the fixed income groups more than the businesses. The income of salaried class has never increased.

So they have to manage their needs within their income. The high salaried class would face problem in purchasing durable luxury goods or replacing the old ones with new.

The middle income group would have to compromise on frequent visits to famous eateries and curtail leisure drives on their vehicles and use of air conditioners.

These savings would enable them to spend more on food items.

The low paid employees get devastated when the rupee declines as sharply as it is declining these days. Rupee value has declined from Rs104 against one dollar to almost Rs150.

Their real income has declined in dollar terms by almost 45.8 percent. A minimum wager that was drawing a salary of Rs15,000 when dollar value was Rs104, was in fact earning $144 per month. With no increase in minimum wage, the wage in dollar terms has declined to $100/month.

These minimum wage earners are finding it very hard to even cover their food needs. They would have to live below poverty line.

The most depressing point in this regard is that there are hardly 25 workers in our labor force that enjoy the luxury of even this meager wage. The government has lost the writ to enforce minimum wage.

A glaring example came in the limelight after the bomb blast outside Data Darbar in Lahore, where four security guards lost their life.

It was found that they were drawing Rs8,000/month from registered security firm that hired them.

Most workers draw similar salaries. It is unimaginable how they survived even before the devaluation. Would they now?