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December 11, 2019

Edging towards super stagflation?


December 11, 2019

LAHORE: Consumers, at large, desire quality products, particularly food items, at reasonable rates; however, majority in Pakistan get substandard edibles at exorbitant rates. Food inflation in Pakistan has been in double digit since September, making even substandard items out of the people’s reach.

Prime Minister Imran Khan immediately after assuming power had highlighted the growth of majority of children in Pakistan was stunted because of malnutrition. He also vowed efforts to improve the situation. His concern was genuine as the children, who do not take adequate nutrition in the first five years, have growth/cognitive issues their whole lives.

Not only their bodies fail to reach their full growth potential, but their learning abilities are also impacted along with their general health. Experts say malnourishment-led physically and mentally compromised adults are less productive and less skilled than their peers, who were well-nourished in their early years.

Unfortunately the access to quality food has further declined because of very high food inflation in past one year. Food inflation was 3 percent in November 2018 and reached over 16 percent in November 19.

Bad crops, currency devaluation, higher government levies on inputs of agricultural products, and very high sales tax on processed food items are some of the top reasons for this spike among others. The normal sales tax is 17 percent but the government charges 3 percent extra sales tax on retails from the producers.

It is because retailers are not documented. Naturally this additional sales tax is also paid by the consumers. In other words the state is punishing the already burdened consumers only because its inability to document them.

Governments, the world over, make extra efforts to ensure food prices remain within the reach of all segments of society. They try to reduce thegovernment levies on food items to keep the prices in check. For instance the edible oil is a major budget item for all households. The edible oil is mostly imported and the government charges hefty levies. After massive devaluation these government levies have also massively increased.

They should have reduced these levies to ensure the total revenues from edible oil remain at pre-devaluation level. Pakistan still has to subsidise the sugar export. Instead of bailing out sugar tycoons, the authorities should have allowed free import of sugar to reduce prices. The ruling regime has admitted it is charging heavy taxes on petroleum products. It could forego Rs20 per liter on petrol and diesel to provide a massive relief to commuters, farmers, and transporters, to reduce the burden. For generating revenues, the state should concentrate its efforts on tax evaders instead of wasting energies on recovering looted money from politicians. The looters should not be spared but those evading taxes are also looters of highest order.

After massive devaluation in past 18 months the income disparities have increased. The middle-class lost most of its purchasing power in the recession-prone Pakistan economy during this period and has abandoned their traditional buying patterns. Pakistanis’ incomes from middle-class downwards are either stagnating or slipping. The poor are more adversely affected and are finding it hard even to arrange one decent meal a day for their dear ones. Food is in fact the major concern of middle-class and poor consumers. The rich are very few and the inflation does not concern them much.

On other fronts the consumers are gradually shifting to imitation of some branded fabrics. As far as branded products are concerned they are certainly better than similar non-branded products but the difference in prices between them is much higher than the benefit of expensive brands. Two years back there were distinctive companies and brands in the consumer market catering to separately to high-end, middle-class and low-end consumers. Now only two types of products are available as the concept of middle-class buyer has vanished. Technological advancement has also ensured there is not much difference in quality. An android phone worth Rs5000 has almost all those features available in Apple’s iphone or Samsung. The additional refinement of some features in Rs150,000 worth iphone does not warrant paying such a high price differential.

This shift in consumer behavior is very much evident in the auto sector where production of high-end cars has declined. In the past demand for value cars constantly increased, while production of low-end cars declined. The well-off middle-class buyers, however, are now more inclined towards low-value cars that are not only cheaper but also somewhat similar or close, in terms of performance, to luxury vehicles.

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