Purchasing power drops in October 2021

ISLAMABAD: The Purchasing Power Index (PRI) continued on a downward trajectory in Pakistan, reaching the lowest in October 2021, as it declined from the benchmark of 85.6 in November 2020 to 79 in October 2021.

In January 2021, this PRI benchmark witnessed improvement when it stood at 86.4 but in the coming months, it continued to show declining trends till October 2021, when it touched the lowest one at 79.

The year-on-year inflation clocked at 9.2 percent in October 2021, while month-on-month inflation stood at 1.9 percent, representing a significant increase in prices and fall in purchasing power to the lowest in the period. This inflationary pressure is due to a significant supply-demand gap and rising energy prices prompted by soaring international petroleum prices.

However, Pakistan Prosperity Index maintained upward trajectory and reached all time high of 142 in October 2021, after a decline in July 2021. This figure signals improvement in economic prosperity at the back of slight uptick in the output of manufacturing sector, higher access to credit for private sector and country’s trade emanating from increase in the domestic demand.

Over November 2020-October 2021, economic prosperity has improved by 1.5 percent, according to PRIME’s latest report Pakistan Prosperity Index. The overall improvement in the country’s economic performance can be attributed to higher business activity on the back of rising domestic and international demand of goods and services, decline in supply chain distortions and return to normalcy.

The trade volume witnessed an increase of Rs538 billion YoY and Rs.3.8 billion MoM on account of an increase in domestic and international demand. In MoM trade growth, exports witnessed an increase of Rs19 billion, while imports witnessed a decline of Rs15 billion in October 2021.

The prevalent high levels of inflation are due to soaring supply-demand gap emanating from monetary expansion carried out through commercial banks’ investment in government securities, higher inflow of remittances, falling productivity and surging petroleum prices.

Economic prosperity as measured by Pakistan Prosperity Index improved in October 2021 on account of increase in private sector borrowing, trade volume and uptick in output of manufacturing sector. In contrast, the purchasing power continues to decline and reached lowest in the period under review. Inflation remains unabated and posts serious threat to the economic prosperity. The supply side issues pertaining to lower productivity and excessive regulations should be addressed to enable innovation and efficiency to mitigate the inflationary pressures.

Currency devaluation and rising international petroleum prices might contribute to economic slowdown if not moderated, the report said.

Large-scale manufacturing (LSM) output posted a growth of 1.9 percent MoM, and a decline of 1.2 percent YoY. The slowdown in manufacturing activities on yearly basis is due to significant increase in the energy and input prices, while monthly increase is associated with rising demand.

The automobile industry maintains a leading position with the growth of 1.2 percent, while textile and food industries having a weightage of 21 percent and 12 percent, showed growth of 0.1 percent and 0.4 percent, respectively.

Private sector borrowing from banks has been on an upward trajectory with Rs197 billion YoY and Rs19 billion MoM increase. Borrowing continues to increase despite slight hike of 25 basis points in policy rate and indication of further hike in coming months. However, the borrowing is likely to slow down after recent hikes in the policy rate.

Although the economic performance is encouraging, caution is needed due to prevalent challenges. The burgeoning current account deficit on the back of significant increase in the international commodity and energy prices and the resultant hike in the policy rate would contribute to economic slowdown in the country. This is cardinal factor in the yearly decline in manufacturing sector output.

The surging global energy prices translate into domestic inflation thus declining the purchasing power / real incomes of the citizens and hindering economic activity. Instead of relying on administrative measures to control prices, addressing the supply side bottlenecks such as lower productivity and interruption in the supply of energy are imperative to lower inflation, especially food inflation, which is the main cause of rising overall inflation in the economy.

The overall economic outlook, as measured by PPI, shows improvement and supports the government’s growth targets. The supply side shocks call for more liberal trade measures and elimination of state intervention in the market. Moreover, prudent economic planning is needed to curtail fiscal deficit.

PRIME Institute publishes monthly PPI report with a lag of two months due to availability of data, which comprises trade volume, lending to private sector, purchasing power and manufacturing output indices.