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Core inflation hits 4-year high in Oct

The interest rate is bound to rise further in the next monetary policy announcement as core inflation inched up further to a four-year high of 8.2% in October 2018, according to data released by the Pakistan Bureau of Statistics (PBS) on Friday.

The 8.2% core inflation is slightly lower than the key discount rate of 8.5% that the State Bank of Pakistan (SBP) announced in September for a period of two months. The narrowing gap between the key interest rate and the core inflation may lead to another round of interest rate hikes in the current fiscal year.

Even the headline inflation, measured by the Consumer Price Index (CPI), jumped 7% in October – the highest pace in the past four years and beating expectation of less than 6% 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% by the end of current fiscal year in June 2019.

Core inflation, excluding volatile food and energy prices, went up from 8% in September. The 8.2% core inflation was the highest in the past over four years. Last time, when the reading stood above that level was in July 2014 when the core inflation was 8.3%.

A further increase in the interest rate will make it more challenging for Prime Minister Imran Khan to achieve his goal of constructing five million homes at affordable costs.

The headline inflation soared 7% in October, which was significantly higher than expectation. Key factors behind the 7% inflation were increase in prices of oil and gas, said the PBS National Accounts’ acting member.

Gas prices increased 104.9% in October whereas high-speed diesel prices rose 34.2% in the month that caused nearly 45% hike in bus fares. Heating oil prices increased by 32% last month.

Overall, prices of the housing, water, electricity and gas group increased by one-tenth. The group has a 29.4% weight in the overall inflation basket – the second largest group after food.

Cost of educational services increased 11.5% and Urdu language newspaper charges rose 55% on the back of currency depreciation and increase in the paper cost. Transport group prices surged 18.6% compared to the same month a year ago.

Due to overall inflationary expectations, prices of almost every commodity increased in October, except for some perishable food items. The health cost increased over 9%, followed by nearly 7% rise in prices of clothing and footwear.

Inflation is inching up, particularly from March 2018 onwards. So far, the average inflation in first four months of the current fiscal year (Jul-Oct 2018) stood at 6% as compared to 3.84% in the corresponding period of previous fiscal year. The central bank has also been continuously adjusting its inflationary forecast and lately revised it upwards to 7.5%.

According to minutes of the second last monetary policy committee meeting held in July, the SBP said the headline inflation was expected to rise due to a spillover impact of the ongoing fiscal expansion, potential pass-through of the most recent exchange rate adjustments and the impact of higher inflationary expectations as reflected in the core inflation.

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.

PKR weakens against $

The rupee weakened against the dollar at Rs132.45/Rs132.64 in the inter-bank market on Friday compared with Thursday’s close of Rs132.44/Rs132.62, according to the State Bank of Pakistan (SBP). Last month, the rupee strengthened after Saudi Arabia agreed on a $6-billion assistance package for Pakistan. Earlier in October, a slump in the value of the rupee came after the government decided to knock at the International Monetary Fund’s (IMF) door to avoid default on import payments and debt repayments. This was the fifth round of massive depreciation of the Pakistani currency since December 2017 to tame aggressive demand for dollars in a faltering economy. Cumulatively, the rupee has dropped 26.67% in the last 10 months.

SPI increases 0.22pc

The Sensitive Price Indicator (SPI) for the week ended October 1, 2018 registered an increase of 0.22% for the combined income group, going up from 238.46 points in the prior week to 238.98 in the week under review. However, the SPI for the combined income group rose 5.03% compared to the corresponding week of previous year. The SPI for the lowest income group fell 0.21% compared to the previous week. The index for the group stood at 218.86 points against 219.33 in the previous week, according to provisional figures released by the Pakistan Bureau of Statistics. During the week, average prices of 15 items rose in a selected basket of goods, prices of eight items fell and rates of remaining 30 goods recorded no change.

PKR depreciation against SDR massively hits Pakistan’s finances

Pakistani currency faced a hefty depreciation of Rs25.096 against the SDR – a basket of world’s five major currencies – compared to Rs16.643 to the US dollar in fiscal year 2017-18.

The value of the SDR is based on the basket of five currencies – US dollar, euro, Chinese renminbi, Japanese yen and British pound.

The impact of the huge depreciation against the SDR massively impacted Pakistan’s finances as most of its financial liabilities – like debt repayment – are in SDR form. Simultaneously, the rupee-SDR exchange losses badly hit the State Bank of Pakistan’s (SBP) consolidated profit in fiscal year 2018.

The International Monetary Fund (IMF) maintains supplementary foreign currency reserves of its respective member countries in SDR. The reserves assist the IMF in bailing out its member countries when they need financial support.

The central bank profit dropped 26% to Rs175.67 billion in FY18 mainly due to the exchange losses following rupee depreciation compared to Rs238.06 billion in the preceding year.

It recorded a massive Rs72.28-billion loss due to the rupee depreciation against the SDR compared to a gain of Rs24.56 billion in FY17.

Accordingly, the rupee “depreciation against the SDR resulted in an exchange loss of Rs124.30 billion”, the SBP said in its Annual Performance Review for FY18.

“The exchange gains/losses arise on the FCY (foreign currency) assets and liabilities of the bank,” it added. “Major part of the foreign currency assets of the bank is dollar-denominated whereas the foreign currency liability exposure is mainly SDR-denominated.”

Accordingly, the movement in the rupee-SDR and rupee-dollar exchange rates directly affects the exchange account, the report added. But thanks to the government’s heavy borrowing, because interest income on this front helped shore up net earnings in the year under review, it added.

The interest/markup income increased 23%, or Rs60.73 billion, to Rs321.60 billion in FY18.

“Borrowings by the government from the SBP during FY18 remained the major sources of income for the bank during the year,” the report said.

“The discount income earned on lending to the federal government increased by 22% and interest earned on lending to commercial banks through OMO (Open Market Operation) injections increased by 17% due to larger volumes of reverse repurchases during the year.”

The SBP’s assets increased 12% (Rs838 billion) to Rs7.73 trillion as on June 30, 2018 compared to Rs6.89 trillion on June 30, 2017 “primarily due to increase in government borrowings from the central bank”.

The increase is further augmented due to increase in export-related loans to banks and financial institutions. Liabilities of the bank stood at Rs7.19 trillion as on June 30, 2018 compared to Rs6.32 trillion on June 30, 2017.

“This rise (of Rs873 billion) was led by the increase in currency in circulation, bank deposits, payable under bilateral currency swap agreement and payable to the IMF,” it underlined. “This increase was, however, partly offset by the decrease in government balances.”


Umar dissatisfied with FBR’S tax widening drive

The Pakistan Tehreek-e-Insaf (PTI) government is failing in its two key goals – broadening a narrow tax base and enhancing revenue collection, which has started displeasing Finance Minister Asad Umar who on Thursday sought an explanation for apparent breakdown of the tax machinery.

Umar expressed dissatisfaction over the Federal Board of Revenue’s (FBR) performance in the tax broadening campaign and revenue collection in first four months of the current fiscal year, said sources in the FBR headquarters.

They said the minister rejected the excuses given by taxmen during a visit to the FBR headquarters before departing for China.

The PTI government has promised that it will double tax collection and widen the narrow tax base, which currently comprises only 1.4 million active taxpayers. As part of its campaign, the FBR has started sending notices to the non-filers of income tax returns.

But the government’s drive to target the big fish has started backfiring. These notices have been issued by the Directorate General of Broadening the Tax Base on the basis of data provided by the FBR’s Operations Wing.

Of the 373 notices sent in the first phase, about 145 could not be delivered due to wrong addresses, said the sources. So far, only 19 people have filed tax returns after receiving the notices.

The sources added that the finance minister was unhappy with the progress, but the FBR assured him of producing tangible results by the end of November.

The FBR is serving notices to the tax dodgers under Section 114 (4) and 116 of the Income Tax Ordinance. “These people have purchased properties of over Rs20 million, cars of 1,800cc or more engine capacity or have received rent to the tune of Rs10 million or higher in a year,” said the FBR.

Different FBR wings were not effectively coordinating with each other and there were complaints about lack of automatic data sharing by the information technology wing of the authority, the sources said.

Umar visited the FBR headquarters a day after Minister of State for Revenue Hammad Azhar boasted on Twitter that the government had entered the fourth phase of the drive against non-filers of income tax returns.

“Data relating to more than 2,500 cases of purchase of expensive properties, vehicles and receipt of high rental income by non-filers has been handed over to the relevant FBR field offices for perusal,” added the tweet.

The FBR sources said the finance minister also expressed displeasure over the shortfall in tax revenues. The FBR was able to collect Rs1.1 trillion in taxes in first four months of the current fiscal year and fell short of the target by Rs100 billion.

The growth in revenue collection in the four months was less than 7% while October’s growth was a meagre 1%.

The minister did not accept the reasons provided by the FBR for the shortfall in tax receipts. He was of the view that the targets had been given while taking into account all the factors that the FBR was now blaming for the shortfall, the sources said.

The minister asked the FBR chairman to justify the reasons for the low receipts before Prime Minister Imran Khan during a meeting next week.

The FBR blamed the shortfall on slowdown in the economy, income tax relief given to the salaried class and contraction in taxable imports due to heavy regulatory duties. The slow release of funds for the Public Sector Development Programme also affected the FBR’s tax collection from contractors.

The Supreme Court’s decision to stop the FBR from collecting advance tax on mobile phone calls and reduction in sales tax on petroleum products also impacted the tax collection, according to the FBR authorities.

The sources added that the finance minister wished to enhance collection through administrative means while the FBR still wanted to rely on policy tools to enhance the collection.

The minister also directed the FBR to release nearly Rs15 billion in tax refunds where payment orders had been issued.

‘LNG can assist save Pakistan precious foreign exchange’

Associated Group Chairman Iqbal Z Ahmed has emphasised that he will meet deadlines as he works on a liquefied natural gas (LNG) terminal at Port Qasim, which will help meet future fuel demand of the private sector.

The group’s first 750mmcfd LNG import terminal, also commissioned at Port Qasim under the Pakistan GasPort consortium, was meant to provide re-gasified LNG to three Punjab-based power plants. However, under-utilisation of the terminal is being probed.

“Laws, rules and regulations for any particular deal are approved by cabinet committees and other regulators, how can an investor violate those rules,” Ahmed asked.

The group’s first terminal is being investigated for not being utilised at full capacity, dispute over late commissioning penalty payment and other issues.

“We are in a contract to deliver 96% of our capacity for a whole year and if we fail we will be penalised. The same is the case with the government if it fails to utilise the signed capacity, it will have to make capacity payments,” he said.

Pakistan began importing LNG in a bid to bridge the natural gas deficit and reduce reliance on furnace oil. It started LNG imports in March 2015 and according to industry experts around 160 shipments comprising 10 million tons of LNG have been made through two terminals.

It is expected that by 2020 the demand for imported LNG will go up to 30 million tons.

Currently, Pakistan’s overall gas deficit is around three billion cubic feet per day, 25% of which is being met by importing LNG through floating storage and regasification units.

To date, two RLNG terminals have been set up by the private sector to streamline the entire process.

Ahmed was of the view that LNG was the future of Pakistan. “LNG is the only option, which can save foreign exchange, unlike furnace oil which is much costlier and coal, which has transportation, handling and environmental issues.”

The chairman said the new terminal would prove to be profitable as they were meeting their expenses from the first terminal. “We commissioned the first terminal to set a benchmark for future business, as part of our long-term plan,” Ahmed remarked.

He suggested that the government should ensure continued support and deregulate the sector for a level playing field. “There are many loopholes and the private sector’s role in LNG has yet to be defined. Free this industry and let the private sector jump in and the country will observe a stiff competition and a drop in LNG prices,” Ahmed said.

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