The recent fiscal measures of revenue generation have accelerated the inflationary pressure which will impact the cost of doing business. The World Bank in its report indicated slight improvement in the cost of doing business index from 147th to 135th ranking. The rising inflationary spiral will also make the life of people more miserable, particularly those who belong to poor and lower middle classes. The interest rate is bound to rise in the next monetary policy.
The core inflation has inched up to a four years high of 8.2 percent in October 2018, according to the data released by Pakistan Bureau of Statistics (FBS). The inflation rate is slightly lower than the key discount rate of 8.5 percent. The narrowing gap between the key interest rate and core inflation may lead to another round of interest rate hike in the current fiscal year. Even the headline inflation measured by consumer price index (CPI) jumped to 7 percent—the highest pace in the past four years beating the expectations of less than 6 percent inflation. The worrying inflation reading points towards the unofficial estimate made by the International Monetary Fund (IMF) that inflation in Pakistan would reach close to 14 percent by the end of current fiscal year in June 2019. Core inflation, excluding volatile food and energy prices, went up to 8 percent in September. The 8.2 percent core inflation was the highest in the past four years. Last time when reading stood above that level was in July 20`14 when core inflation was 8.3 percent.
The headline inflation soared to 7 percent in October which was significantly higher than expectations. Key factors behind it were increasing prices of oil, said the FBS National Accounts acting member. Gas prices increased 104.9 percent whereas high speed diesel price rose 34.2 percent that caused nearly 45 percent hike in transport fares. Overall prices of housing, water, electricity have gone up by one-tenth. The group has a 29.4 percent weight in overall inflation basket—the second largest group after food.
Cost of education services has jumped by 11.5 percent and Urdu language newspapers charges rose by 55 percent on the back of currency depreciation and increase in paper cost. Transport group prices surged by 18.6 percent as compared to the same month a year ago. Due to over all inflationary expectations prices of almost every commodity increased, except some perishable food items. The health cost increased by 9 percent followed by nearly 7 percent rise in prices of clothing and footwear.
A further increase in the interest rate will push up the cost of doing business and make the economic environment more unfriendly for domestic and foreign investment. It will also make it more challenging for the Prime Minister Imran Khan to achieve his goal of constructing five million houses at affordable price. It will certainly offset the gains of lower power and gas tariffs allowed to export industries.
After July, the government has also levied more regulatory duties in addition to letting the rupee depreciate further against the US currency. The impact of these measures will be more visible in coming months. The currency devaluation may not reflect in the proportionate increase in exports. A number of export products consume the imported intermediate goods and raw material. Upward adjustment in regulatory duties on the imported raw material, intermediate goods and currency depreciation will make the exports less competitive.
Remittances from more than8 million overseas Pakistan are likely to post double digit growth and Pakistan is expected to receive $ 22 billion in the current financial year as compared with $ 19.62 billion last year. But the sagging exports due to loss of comparative advantage in the international market. A tradeoff has to be sought between the fiscal plus monetary recipe and prevailing economic environment. Let us hope the ghost of “Darnomics” will be scared away and the finance minister will reconstitute its team of economic managers as still the policies of former finance minster Ishaq Dar seems to be all pervading.