Headline Inflation & monetary Hangover

Pakistan is faced with roaring headline inflation and monetary hangover these days. The government has once again approached the International Monetary Fund to obtain dollars to run its affairs. The IMF has tasked the government with an ambitious economic reform programme to reverse the current large fiscal deficits, fostering inclusive growth and addressing Pakistan’s short- and medium-term problems.

The IMF says: Pakistani government has already implemented key measures to ensure a strong start, including fiscal consolidation measures totalling 2% of GDP, adjusting electricity tariffs as part of a new comprehensive energy policy, reorienting monetary policy to rebuild foreign exchange reserves, besides reducing inflation, and launching a decisive tax enforcement programme.

The IMF hopes: these measures will reduce the budget deficit to sustainable levels, curb crowding-out of private investment and containing inflation over the medium-term.

The IMF reforms agenda:
Raising growth gradually to near 5% by 2015/16 as macroeconomic stability is entrenched and structural reforms are pursued.
Bringing inflation down to 6-7% by 2015/16, from the current level of 8.3%.
Increasing central bank reserves to over 3½ months of imports by 2015/16.
Reducing the fiscal deficit to 3.5% of GDP by 2015/16 from an estimated 8.0% in 2012/13, with provincial governments contributing their fair share of the fiscal consolidation process.
Liberalizing the trade regime and reforming public sector enterprises through restructuring and/or privatization.
Improving the business climate.
Strengthening the tax system.

Reducing the fiscal deficit and reorienting the monetary policy to rebuild forex reserves ring sweet bells into one’s ears. But, in reality, methods being applied by the government for the purpose are weird. Instead of minimizing non-development expenditures and encouraging austerity measures, the government jacked up the power tariff. Subsidies to the power sector stand eliminated, and electricity prices for industrial and commercial users have been increased. Domestic consumers are likely to take the hit in run-up.

Likewise, the government has employed a novel way to accomplish IMF diktat to build forex reserves. Instead of introducing export promotion measures, the government is buying dollars from the domestic market. It is no rocket-science to understand what happens if government decides to buy something.
Ironically, the government is short of cash to meet even its daily expenses and it is minting money for running its expenditures, retiring debts it owes to commercial banks and acquiring dollars from the domestic market. This adds fuel to the fire and the rupee is falling against the dollar. From July to September 16 this year, the State Bank of Pakistan printed currency notes worth 797 billion rupees. The depreciating rupee effected the rise in petroleum prices. If it continues, the weakened rupee would open the floodgates to price hike in every sector.

Impact on Electricity Price
Oil prices and its fluctuations are a consequential macroeconomic concern for both developed and developing countries. For oil importing countries, like Pakistan, the impact of irregular and unexpected price hikes quickly seeps into domestic economy, threatening the already-existing macroeconomic imbalances.

Oil price hikes are aggravating the energy shortage in Pakistan which is now feeding into increased general prices, transportation cost, slowing down agricultural and industrial productivity and aggravated water shortages for the rural economy.

Impact on Inflation
Higher oil prices directly lead to rising food prices. Resultantly, there is a substantial increase in headline inflation. The recent need to import food items like wheat, sugar, etc. and depreciation of rupee further led to an increase in food prices. Due to increase in global oil prices and import bill of food group, headline inflation is constantly soaring.

Like other developing countries (Ethiopia, Sri Lanka and Ukraine), Pakistan too is facing inflationary impact of rising food and oil prices which will amplify by continuing demand pressures. Besides increase in oil prices, high food prices are due to withdrawal of or reduction in subsidy as existing subsidy became too costly for the government.

Soaring oil and food prices have a negative impact on growth and drive up the cost of inputs. So, the low’ income households find it very difficult to protect themselves against inflation, especially the urban ones.

No matter what sweet figures are quoted by the finance wizards of Nawaz Sharif government and what silver-quoted data is shown to the public, most Pakistanis are faced with the demon of price hike in every walk of life. People who roared in tandem with the lion on May 11 now bemoan that the prices of eatables and commodities like petroleum products, electricity and gas are shooting up.

However, the lion’s sense of humour is unmatchable. The government has started cracking jokes with the masses. The latest government figures on headline inflation need no explanation. In the midst of constantly-rising commodity and utility prices, the federal government reports that inflation rate decelerated to 7.4% in September this year compared to 8.5% in the same month a year ago. The Pakistan Bureau of Statistics reports Consumer Price Index (CPI) – a basket of 487 goods and services capturing change in prices.

These figures have surprised many as even the economic planners had projected that increases in inflation rate will remain steady due to an increase in the prices of electricity for industrial and commercial consumers and a hike in petroleum products. However, despite increased electricity and petroleum prices, the Pakistan Bureau of Statistics showed that electricity prices remained constant year on year basis in September while prices of motor fuel decreased by 5.5%.

‘The September inflation figures suggest that inflation is not at all a monetary phenomenon in Pakistan and we should not talk about monetary overhang, as it has been established by PBS’, said Dr Ashfaque Hasan Khan, Dean of Business School of National University of Science and Technology while criticising the statistics body. He suggests inflation figures should be verified by a third party, may be by International Monetary Fund.

By: Asad Kaleem

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