Buckling under pressure

October 24, 2021

Will price escalations solve structural problems? Short-sighted measures may actually fuel more destruction and force the government to take tough political decisions in an attempt to end continuous losses

The most dangerous aspect of rising inflation is the upsurge in the prices of food items. — Photo by Rahat Dar
The most dangerous aspect of rising inflation is the upsurge in the prices of food items. 
— Photo by Rahat Dar

Rising inflationary pressures have eroded the purchasing power of a majority of Pakistanis especially for the low-income and fixed-income earners.

Latest estimates suggest that 40 percent of Pakistan’s population are living below the poverty line, indicating that over 50 million people are unable to fulfil their basic needs and live a decent life.

The government has now conceded that there is no possibility for bringing relief to inflation-stricken masses till March 2022 in the wake of rising commodities and POL prices in the international market. Asad Umar, the federal minister for planning and development, while quoting experts, had predicted that inflation would remain on the higher side over the next few months because Pakistan “had to import commodities and POL products from international markets”.

However, with or without the IMF programme, the rate of inflation is expected to be increase even further over the next six to nine months. If the tough IMF conditions are implemented then the inflationary pressure will increase yet again. Many economists believe that the price increases will have to be adjusted sooner or later. These bitter pills should be swallowed once and for all, they say. However, there should be a re-evaluation of the complexities brought about by repeated price hikes touted as the IMF’s prescription and without bringing necessary reforms.

The question to ask is this: Will price escalations solve structural problems and fix cash-bleeding state-owned enterprises? Short-sighted measures may actually fuel more destruction and force the government to take tough political decisions in an attempt to end continuous losses.

Dr Hafiz A Pasha, the former finance minister, has recently predicted that two actions taken by the government on account of jacking up petroleum prices by making petrol Rs 10.49 per litre dearer and diesel by Rs 12.44 per litre as well as increasing electricity prices by Rs 1.39 per unit, would further jack up CPI-based inflation by 3 percentage points, increasing from existing level of 9 percent to 12 percent in one go.

“This is an unprecedented increase, which will make lives of the poor more miserable,” he adds.

Overall, the Consumer Price Index (CPI) has hovered close to the double-digits because of a variety of reasons including high commodities and petroleum prices in the international market because of supply disruptions and a surge in logistics costs, increased utility prices, and most importantly – massive devaluation of rupee against US dollar. There is a need to divide pre-Covid and post-Covid situations separately to analyse situations in the proper context.

The official data clearly indicate the fact that the Wholesale Price Index (WPI) surged by 19.6 percent on a yearly basis in September 2021. There is a time lag in how the price increase trickles in from the wholesale to retail stage. So the CPI-based inflation is bound to increase in the coming months.

The most dangerous aspect of rising inflation is related to an upsurge in the prices of food items. The Sensitive Price Index (SPI) inflation on YoY basis increased by 16.6 percent in September 2021 as compared to an increase of 15.9 percent a month earlier and an increase of 12 percent in September 2020.

First of all, there is a need to analyse the reasons for this unprecedented hike in the prices of essential food items and POL products. The government argued that the rising imports induced inflationary pressures but the government did not pass on the full burden to the domestic consumers.

Pakistan had to import over $8.4 billion commodities during the last fiscal year. The government found itself struggling to explain why despite being an agricultural country, Pakistan had imported wheat, sugar, pulses, palm oil, and cotton. The import of wheat, sugar, pulses, and palm oil is still continuing.

Now the official circles are arguing that the price of Brent crude oil in the international market went up by 81.55 percent in the last year from September 2020 to September 2021 while in Pakistan the POL prices rose by just 17.55 percent.

There has been no increase in domestic gas prices in the last year while RLNG prices rose by 64 percent in the international market. On average, gas prices went up by 16 percent in the international market while in Pakistan gas prices were raised by 8.5 percent.

The prices of cooking oil went up 48 percent in the international market while these increased by 38 percent in the domestic market.

The prices of sugar increased by 53 percent in the international market while in Pakistan these went up by 15 percent. The prices of urea fertiliser rose by 66 percent in the international market; it went up by 28 percent in the domestic market.

The rate of GST was slashed down from 17 percent to 6.8 percent while the petroleum levy was reduced from Rs 30 per litre to Rs 5.62 per litre in order to avoid passing on full burden to consumers.

On diesel oil, the GST was reduced from 17 percent to 10.3 percent while petroleum was brought down from Rs 30 to Rs 5.14 per litre. The Customs Duty on POL products was also reduced by Rs 3 as it stood at Rs 7.50 per litre on petrol and Rs 9.27 per litre on diesel.

The government spokespersons ignores the fact that massive devaluation also resulted in higher prices of petroleum products.

It is relevant to mention here that the prices of Brent Crude Oil had touched $147 per barrel at one point in the international market during the tenure of the PPP-led government from 2008 to 2013 but the POL prices remained around Rs 110 per litre in the domestic market.

The Brent Crude touched $85 per barrel on October 16, and there was a time lag as the container imported one and half months back at a price of $76 per barrel should have passed on prices on the consumers. The price per litre of petrol stands at Rs 137.79 and of diesel oil at Rs 134.48. The reason for this raise in retail prices of POL products is mainly the devaluation (Rs 173 against a dollar). When this government had come into power, the exchange rate stood at Rs 122 against the dollar. Dr Reza Baqir, the SBP governor was making efforts to justify devaluation and positing that it was “providing extra money of $3 billion among those who were sending remittances from abroad to help their families living in Pakistan”. The central bank governor ignored the fact that the massive devaluation was causing unprecedented price hikes and fleecing voiceless consumers.

The price of wheat flour has risen mainly because the support price of wheat was jacked up from Rs 1,400 to Rs 1,800 per 40 kg. This was a policy decision as the government chose to provide relief to rural farmers at the cost of urban consumers.

The solution lies in enhancing the productivity and efficiency of the agriculture sector. It’s shameful that Pakistan, despite being an agricultural economy, continued to import all commodities by utilising precious foreign exchange of $8.4 billion on an annual basis.

The government is going to launch a targetted subsidy programme for providing some cushion to the inflation-hit masses. How far that can help remains to be seen. There will be limits to this programme as only a certain number of identified families under Ehsas Scorecard would become its beneficiaries. Realistically speaking, the government cannot afford to dole out subsidies for all or most people.

Without enhancing the productivity of the agriculture sector, the aspiration for self-reliance will remain unlikely to be realised. Such lofty ambitions require comprehensive plans that hinge on establishing coordination with all stakeholders to chalk out and achieve short, medium and long-term objectives.


The writer is senior staff reporter at The News International,  Islamabad

Buckling under pressure