Credibility Gap

Skyrocketing prices burning a deep hole in common man’s pocket

Karachi: The 13-party coalition government, which came into power with tall claims of curbing inflation, has failed to provide any relief to the common man. Pakistan has been caught up in the worst phase of political and economic crises since former prime minister Imran Khan was dethroned in April 2022.

The prices of daily items are skyrocketing, rendering a deep hole in the common man’s pocket. Moreover, the monsoon floods of 2022 have come as an additional burden and multiplied the ripple impact of inflation.

Inflation has risen to a 48-year high, amid crucial talks with the visiting International Monetary Fund (IMF) delegation. The year-on-year inflation in January 2023 was recorded at 27.55 per cent, the highest since May 1975, with thousands of containers of imports held up at the Karachi Port, as the government is unable to clear them for the paucity of foreign exchange. This has pushed it on the verge of bankruptcy.

The government’s disastrous policy to curtail imports through administrative measures and freezing the dollar, ignoring rational economics, has distorted the prices across the country.

Onion prices rose around 500 per cent on a year-on-year basis in January, while the costs of rice, pulses and wheat have also surged nearly 50 per cent in a year.

Experts believe that another wave of inflation is in the offing after Finance Minister Ishaq Dar has loosened his grip on the dollar’s valuation. As the dollar spiked sharply and is now hovering above Rs270, the prices of goods, including energy, will also shoot up.

In fact, the appointment of Dar as the finance minister is being termed the biggest mistake of the coalition government, as he has failed to walk the talk. He tried to arrest the strengthening dollar with the administrative and irrational measures, and flunked.

The foreign exchange reserves of the State Bank of Pakistan fell to $2.917 billion by the week ended February 3, 2023, which is equal to providing the import payment for 18 days only.

The official foreign exchange reserves of the central bank declined sharply to an almost nine-year low. Previously, the official foreign exchange reserves of the SBP were seen at $3.87 billion in February 2014.

The foreign exchange reserves held by the central bank witnessed a record high of $20.146 billion by the week ended August 27, 2021. Since then, these have dropped by $17.06 billion, enough to show the incompetence of the present government’s two successive finance ministers Miftah Ismail and Ishaq Dar.

Dar also imposed stringent restrictions on the issuance of the letters of credit (LCs) for imports to curtail trade deficit and save dollars, which flourished a black market, where the dollar was sold at around Rs270 to Rs280, while the interbank exchange rates were Rs225 against the greenback.

The government’s intention to cap the dollar rate adversely affected the inflows, especially the workers’ remittances and export receipts.

Arun Leslie John, chief market analyst at Century Financial, said that the government is facing a severe balance of payments crisis, with the foreign exchange reserves dropping to less than three weeks of import cover, which has meant the currency is severely depreciated.

“The much-needed containers of food items, raw materials and equipment are blocked in ports after the government curtailed imports, resulting in a production halt and the prices climbing further. Besides, the 2022 floods destroyed its cotton crop, which is crucial for its biggest export — cotton textiles, compounding the issue,” John added.

For him, now the government has no other option but to go ahead with the economic reforms, which will be a bitter pill for the larger population.

“To secure the IMF bailout, the country must adhere to the reforms, especially in the energy sector. Wherein the energy sector debt totalled over Rs4 trillion ($14.55 billion) that includes Rs1.6 trillion in the gas sector. Moreover, as demanded by the IMF, the country has shifted to a market-based exchange rate and hiked fuel prices, making the already expensive energy costlier,” John said.

Shaukat Tarin, former finance minister, said that the so-called experienced and competent PDM government, imposed on us, has brought the country to the brink of default. Now, there is no time for further inaction. They should fulfil the IMF conditions and quit to save the country from an economic meltdown.

“The Consumer Price Index (CPI) rises to 27.6 per cent and the food inflation by 39 per cent in January. It does not include the latest increases in the fuel prices. As predicted by us, the prices will rise sharply after the IMF conditions are implemented. The PDM government came to reduce inflation, which was 12.2 per cent in March 2022. Shameful,” he said.

Experts said the fresh wave of inflation erodes a family’s purchasing power and hurts those at the bottom of the economic ladder.

According to John, over the last year, the buying power of the common man has drastically declined, pushing them to live in poverty.

“Inflation has led to the rising cost of utilities, food and gasoline, increasing the number of people living in poverty. The prices of daily items have shot through the roof, with diesel prices surging 61 per cent, while the petrol prices shot up 48 per cent. The application of the IMF conditions on the power tariffs, implementation of new taxes to raise revenues and reduce the fiscal deficit will be a painful process directly affecting the common man,” he said.

A A H Soomro, an independent analyst, said that in simple terms, the people’s purchasing power has decreased 30 to 40 per cent in a year’s time.

“The very survival of the masses is being questioned in such economic contraction, let alone saving for the future,” Soomro added.

According to him, inflation is rising due to multifaceted challenges, including the rupee depreciation, rising global energy prices and further indirect taxes under the IMF conditions.

“The government is teetering at the edge to dodge tough bullets that are needed to sustain the economic equation. They would rather want a five-year mandate and go slower than the radical drastic measures needed. Delaying the inevitable makes it even harder to take corrective actions,” Soomro remarked.

Why does rate hike fail to control inflation?

The State Bank of Pakistan (SBP) primarily uses demand management strategies to reduce inflation. However, a tight monetary policy and other demand management strategies are ineffective at preventing cost-push inflation, experts said.

The supply-side factors have a crucial role in driving inflation up and the primary routes of the supply-side shocks are the currency rate and domestic food prices, they added.

To control the country’s decades-high inflation, the central bank in January increased the policy rate by 100 basis points to 17 per cent, the highest in 24 years.

Arun Leslie John, chief market analyst at Century Financial, said that the supply-side shocks are to blame for the country’s current inflation, making the conventional monetary policy transmission channel an inefficient tool to control it.

“A strict monetary policy is intended to manage the economy’s total demand. If the interest rate channel is unable to keep the inflation under control, it will just slow the economic growth without achieving its primary objective. Therefore, it is necessary to reformulate the current policies to enhance the nation’s economic performance. The currency rate plays a significant role in determining the prices of imported raw commodities and fuels,” John said.

According to him, the rupee depreciation has been a significant driver of inflation. The government must significantly reduce imports through import compression policies to control the current account deficit.

“The balance of payments deficit must be carefully maintained for the exchange rate to be stabilised and remain stable over time. Additionally, it is advised that the government exercise economic restraint when financing the budget. The fiscal irresponsibility causes the State Bank of Pakistan to lose control over the money supply, making monetary policy ineffective,” John said.

Ted Stephenson, professor at George Brown College, Toronto, said that too many global factors are causing global inflation. The factors such as rising commodity prices combined with a weaker rupee can also contribute to inflation in Pakistan.

“In January, the Monetary Policy Committee (MPC) decided to raise the policy rate by 100 basis points to 17 per cent. This decision reflects the MPC’s view that the inflationary pressures have proven to be stronger and more persistent than expected. Amid the ongoing economic slowdown, the inflation is increasingly being driven by persistent global and domestic supply shocks that are raising costs,” he added.

“Food prices have accelerated significantly due to the crop damage from the recent floods and core inflation has risen further,” Stephenson said, adding that the food inflation globally will continue in 2023.”

ANNUAL RISE IN THE PRICES

Onions ……………………………………………….  468.54%

Chicken ………………………………………………..  83.27%

Wheat …………………………………………………..  78.39%

Rice ……………………………………………………..  65.24%

Wheat Flour ………………………………………….  61.25%

Gram Whole …………………………………………  50.47%

Pulse Moong …………………………………………….  46%

Pulse Gram…………………………………………… 44.53%

Besan …………………………………………………..  43.25%

Mustard Oil …………………………………………..  42.28%

Pulse Mash …………………………………………….  37.1%

Fresh Fruits ………………………………………….  35.33%

Cooking Oil ………………………………………….  31.46%

Milk Fresh …………………………………………….  29.27%

Vegetable Ghee …………………………………….  28.49%

Tomatoes ……………………………………………..  22.44%

Fish ……………………………………………………..  22.28%

Pulse Masoor          22.07%