Double-digit inflation

 

KARACHI: Irfan Ahmed, an electric generator assembling business owner in Karachi and a Perkins’ authorised distributor, calculates at least 20 per cent decline in his January revenues and predicts a similar trend in the months ahead.

“Just in two days, the cost of materials and parts we use surged around 10 per cent because of the tax exemptions withdrawn via the mini-budget.”

Although the Finance Supplementary Amendment Bill 2021 has not been passed, the prices have increased because of the absence of a price control mechanism.

Ahmed says that most of the SME manufacturers and producers cannot pass the impact to their consumers. “Businesses like us are forward-booking for several months. Since the contracts are locked, we have to bear the increased input costs at the cost of our profit.”

The government has proposed to collect an additional Rs343 billion through additional taxes on the import of automobiles, electronics, steel, cement, capital goods, toys, paper products, fertilisers and pharmaceuticals.

Ali A Raheem, director of Baker Tilly International, and former president of the Karachi Tax Bar Association (KTBA), said that the cost of doing business would definitely increase. “Most of the goods are zero-rated, i.e., taxes collected are refundable. But the refunds remain stuck, which causes a liquidity crunch and increases the borrowing costs.”

“However, there would be marginal or no impact on the budget of a common household,” he added.

Businesses do face a wave of rising costs, and no one foresees any ease off at least in the upcoming year. The demand hasn’t been impacted yet, which may be due to hoarding as retailers wouldn’t want empty shelves again against the fast-spreading Omicron, but going forward, these higher costs would eventually take toll on the demand, which may be the goal of Pakistan’s financial managers, i.e., demand suppression.

Gatron Industries Chairman Javed Bilwani estimates around a 30 per cent increase in the raw material costs during the last one year. “This does not include around 700 per cent increase in the freight costs,” he said.

There was no let-up in inflation, which is primarily fuelled by higher petroleum prices and depreciating local currency.

“Industries are forced to bear higher overheads due to upward revision in electricity and gas tariffs,” he added.

Forecasting how much higher energy costs will go is tricky; much depends on whether the pandemic is still weighing on the global economy next year or is largely over, with oil demand rebounding strongly worldwide.

According to Business Cost Outlooks for 2022 by the Kiplinger Washington Editors, the 2022 gasoline and diesel prices should be averaging 5 to 10 per cent higher than 2021 levels.

“That’s a smaller increase than seen this year, with gas prices rising 40 per cent from early January to the present, as [the] demand recovered faster than output.”

Rising costs have impacted the export-oriented and non-export industries alike.

“The cost of raw materials used in the tyre manufacturing has increased 25 per cent in the last six months, which is the reason behind current hike in its prices in the local market,” a General Tyres spokesman said.

“The prices of tyres are affected by a number of factors, including global raw material price increase, supply chain disruptions, the rupee depreciation and increased utility costs.”

Qarib Buneri, a marble businessman, said that the cost of running the factory increased in the current year. “The power tariff more than doubled during recent months, and it is forcing the manufacturers to raise prices of marble products,” he said.

To recall, the fuel cost component in the country’s overall electricity generation surged 85 per cent YoY to Rs6.32/KWh during November 2021.

“The machinery parts increased 50 per cent, including metal plates for welding the machinery. The hike in petroleum products is also affecting the business, as diesel is now available at around Rs143/litre, compared with around Rs115/litre, and transporting the items to cities such as Hyderabad and the Punjab province by heavy trucks is wreaking heavy losses on the businessmen.

The parts of vehicles used to transport the products are skyrocketing, the price of an axle of a truck doubled in the current year, as it is now worth Rs16,000, compared with Rs8,000, about a year ago.

“These factors are forcing manufacturers to increase prices of their products, resulting in less sales. The average sales of the factory reduced by around 50 per cent, while the government is taking no steps to provide relief to the business community of the country.”

Prices of automobiles, electronics, steel, cement, capital goods, toys, paper products, fertilisers and pharmaceuticals have increased significantly in the past year.

All Karachi Tajir Ittehad Chairman Atiq Mir said that the price hike did impact the demand.

“People are buying fewer and even low-quality goods now. So far, there has been no considerable impact on the demand for basic necessities, but going forward, things are likely to get worse

Supply Chain Costs

Businesses are bracing for more steep increases in the shipping and logistics prices next year after the supply-chain costs soared in the scramble to move goods during the Covid-19 pandemic.

The transportation and logistics providers are seeking big boosts in prices for contracts for the coming year, signalling that the inflationary pressure driven by strong demand and tight capacity in freight markets is likely to persist.

Baig Group of Companies Chairman Mirza Ikhtiyar Baig said that the freight costs had surged over 700 per cent in the last one year. “Exporters make deals on cost and freight basis, and they have to bear the freight costs, which obviously reflects on the selling price.”

A container, which cost $1,200 a year ago is now hardly available at $7,000. “This container and vessel shortage is a global phenomenon, and we shouldn’t expect any downward revision in freight rates any sooner.”

He said that the rupee depreciation had multiplied the impact whether it was freight or cost of raw material import. “I don’t see any significant improvement in the cost of doing business or reduction in inflation, going forward. However, oil price decline in the international market would give a little respite to the business and industry.”

With high shipping demand still far outweighing tight capacity across the freight sector, industry experts say transport operators have leverage to raise prices when negotiating new contracts.

A WSJ measure in the Logistics Managers’ Index that tracks the overall logistics prices, including transportation, warehousing and inventory prices, reached a record in November, up 3.4 per cent from October and a 14 per cent increase on a year-on-year basis.

Textile exports

Textile exports for November 2021 registered a growth of 35.3 per cent to stand at $1.74 billion. The improvement in the global demand for textile products, amid robust US apparel demand and return to normalcy phenomenon in global economies (EU and North America) has opened up multiple growth fronts for the local textile players.

Mohsin Ali at AKD Securities said with the global textile dynamics continuing to remain favourable, amid brewing trade war between the US and China and yarn margins remaining elevated, the local textile sector was in a sweet spot.

“However, the recent development of a discontinuation of gas in Punjab has put the local textile players in jeopardy. Now they have to rely on electricity from the grid as opposed to their own captive power plants.”

Moreover, rising cases of Omicron virus pose a serious threat to the global economies where any kind of lockdown could hurt the robust textile exports.

An industry official said that the leading textile companies have their orders booked for the next six to eight months. “Retailers are piling up as they don’t want empty shelves again, as lockdowns are looming again. There is a bit of hoarding by the international buyers.”

Several fabric buyers could not deliver their shipments on time, which led to cancellation of their orders.

“The buyers of fabric, which mostly are manufacturing concerns, are buying more than usual; while big retail chains are also buying more than usual.”

Mini-budget

Businessmen Panel (BMP) Chairman and Federation of Pakistan Chambers of Commerce and Industry (FPCCI) former president Mian Anjum Nisar said that the regular attempt of economic managers to impose new taxes and increasing oil prices along with the hike in the power and gas tariffs will ultimately harm the government’s overall move to reduce the production cost for the businesses.

“The industry is the main victim of this IMF (International Monetary Fund) interference, as donors’ involvement in our economic matters and dictations to the policymakers… would add to the economic miseries of the country.”

“After new taxes in the mini-budget, the prices of goods such as milk, cereals, bakery items, meat, chicken, gold, bicycles, cars, including electric cars and mobile phones will unleash another wave of inflation in the country.”

Inflation jumped to 12.3 per cent last month and the State Bank of Pakistan has also upward adjusted its inflation projection to 11 per cent for the current fiscal, as the government is planning to withdraw electricity subsidies.

Outlook

Despite tall claims by the government, the consumers’ have to dig deep into the family budgets. The present economic conditions are not only complicating the recovery of individual consumers from the pandemic effects but also putting the country’s economy at risk.

After stalling last year due to the Covid-19, the Pakistan economy is sputtering back to life in the current fiscal year with a rebound, plus a shift in the consumption from services to goods by the households, meaning that boom in the demand, which has, otherwise
outstripped the supply, is still staggered by the pandemic and resulted in price hike.

Certain manufacturing sectors have been hit by the lack of government’s support, particularly those which have to import raw materials. The catchphrase from the finance managers and central bank chief about inflation remains invariable and transitory, as, according to them, it is the outcome of the low point of comparison from the last year and is causing short-term supply problems that will be resolved with the passage of time.

This argument clearly shows that

the process of curtailing inflation will take longer-than-anticipated time and the inflation overshoot is likely to get worse.