Galloping inflation

The economy has remained in the state of stagflation, a mix of steadily rising inflation and stagnation, from 2009 to 2016. But after the end of International Monetary Fund (IMF) Extended Fund Facility bailout programme the inflationary pressures gradually got momentum and has now become galloping due to fast depreciation of rupee, sagging exports and frequent doses of increase in the prices of petroleum products. The inflation rate rose 5.2 percent in June which is at highest level in the past 44 months. The recent inflationary pressure has been pent up by two rounds of hike in the prices of petroleum products and rupee depreciation by almost 19 months.

The high prices spiral will impact every house hold besides causing further slowdown of the productive activities in the agriculture and manufacturing sectors. Measured by consumer price index (CPI), the average increase of 40 items has been calculated at 5.2 percent, reported by Pakistan Bureau of Statics (PBS) on Wednesday. Many retail outlets that have pegged prices of daily use commodities with the US dollar have jacked up in June when compared with May 2018, mainly reflecting the impact of higher oil prices.

In order to rein in inflation and correct other macroeconomic imbalances government largely relied on monetary policy operation with little attention to fiscal measures based on direct taxation. The State Bank of Pakistan (SBP) on May 28 increased the key policy rate by 50 basis points to 6.50 percent. In its monetary policy statement central bank acknowledged that building up of inflationary pressure has started going up suddenly. PBS data shows the core inflation rose further to 7.1 percent in June which is higher than SBP policy rate.

Owing to the increase in policy rate, the government’s cost of borrowing through Pakistan Investment Board has also jumped. Apart from this, the finance ministry has approved increase in profit rates of National Saving schemes in the range 12 to 50 basis points. Another round of currency depreciation and further rise in policy rate—at which central bank lends money to commercial banks—are expected at times when Pakistan will seek another inevitable bail out programme with IMF.

Forecasting inflationary trends, the SBP in its policy statement hinted a significant change in crude oil prices outlook, lagged pass through exchange adjustments, and food inflation maintaining its current course would largely determine the path of inflation for the fiscal year 2018-19. A private research house on Wednesday predicted that inflationary pressures are likely to remain in the new fiscal year due to currency rate adjustments, higher crude oil prices and recent budgetary measures.

In the food group, the cost of betel leaves rose by 190 percent after the levy of regulatory duty, Chicken price jumped over 26 percent, followed by 16 percent rise in the prices of tomatoes, 14 percent in onions and 10 percent in dry fruits. Meat became expensive by 10 percent and prices of pulses also gone up.

The Chief Justice of Pakistan Mian Saqib Nisar had to take a Suo motu on the exorbitant and unreasonable tax, cess, duty and fee on petroleum products. Presiding over a three-judge bench on Thursday the Chief Justice observed that that Supreme Court wants a reduction in recently increased prices of petroleum products and has asked the stakeholders to work out a comprehensive plan and come up with suggestions to keep the prices at a reasonable level.

The caretaker government may have been compelled by urgent need of additional revenue generation through jacking up POL prices. Contrary to rosy picture about the encouraging response to tax amnesty on offshore accounts by a particular media house, the ground reality tells a different story. The tax amnesty on offshore assets has evoked a poor response. Nearly $ 6 billion, hardly 4 percent of the estimated wealth has so far been declared, with Pakistanis repatriating a paltry sum of less than $ 30 million whereas the Federal Board of Revenue had expected a tax collection of $ 4 billion on offshore accounts. “Initial figures for the period of April 10 to June 30 that Pakistanis have paid $ 29 million in taxes on nearly $ billion of declared assets,” said a source in SBP. Hence the assets transferred to Pakistan were around $ 30 million even less than 1 percent of the conservative repatriation estimates of $ 3 billion.

The new wave of galloping inflation will make our exports less competitive in the international market and their downtrend will continue. The unfavorable economic environment will further shrink domestic and foreign investment accentuating the economic meltdown.


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