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Impact of rising inflation

The Consumer Price Index (CPI) inflation in Pakistan increased by 8.8% in April 2019 as compared to an increase of 9.4% in the previous month and 3.7%, a year ago, according to the Pakistan Bureau of Statistics (PBS). The CPI increased by 0.1.3% month-on-month basis in April over previous month. The Wholesale Price Index (WPI) in April increased by 0.13.8%, and Sensitive Price Index (SPI) increased by 9.3% over same month a year ago.

The Asian Development Bank in a recent report forecast that Pakistan’s GDP growth will slowdown further to 3.9% in fiscal year 2019 as macroeconomic challenges continue despite steps to tighten the fiscal and monetary policies to rein in high and unsustainable twin deficits. The report said, “Until macroeconomic imbalances are alleviated, the outlook is for slower growth, higher inflation, pressure on the currency and heavy external financing needed to maintain even a minimal cushion of foreign exchange reserves.”

Devaluation of rupee against all major international currencies is the reflection of weakness of the economy. A rising dollar against rupee reflects the country’s reliance on imported goods. The rupee is also in a free fall owing to the widening current account deficit, excessive government borrowing, drying up foreign flows, increasing oil imports, and repayments to the IMF.

The persistent depreciation of rupee is also fueling inflation. The high inflation will not only hit the poor hardest but it will also affect all segments of the economy. The poor and the lower middle class find it increasingly difficult to make both ends meet with soaring prices of essential commodities including foodstuff. The poor are highly sensitive to the price changes in food, particularly staple food items. Households struggling to meet the minimum standards of living might have no choice but to cut down their expenditures on health and children’s education. Low inflation provides the central bank a cushion to slash its benchmark interest rate to spur economic growth. Soaring inflation has not only raised the credit price but also weakened the purchasing power of the people. The experts argue that higher discount rate and inflation is positively related. However, the solution lies to bring down food inflation with augmenting the supply of food, improving governance and distribution networks.

Present government continued to increase petroleum product prices for the last two months. The rupee slide has made the imports particularly the oil imports, costlier. The government raised fuel prices from due to depreciation of the rupee, though price of oil in the international market was relatively stable. If the government raises prices of petroleum products in a move to pass on the full impact of international oil prices to domestic consumers, it is bound to spark inflation and affect industry in the country. Hike in fuel prices drives up inflation in the country by increasing transportation costs.

 

Inflation pushes more people below poverty line with the onset of high oil prices and continues to increase food prices. The high inflation marred the investment potential and expansion of the economy since 2009. The country’s headline inflation mounted to 25 percent in October 2008 due to sharp increase in oil prices, political instability and security situation. However, inflation growth eased to 8.9 percent in October 2009, but rebounded towards higher side on the back of government decisions to increase power and gas tariffs. Local analysts believe that high utility costs and rise in the international commodity prices including oil further inflates prices affecting the local consumer prices. Some analysts identify pass-through of higher oil prices by the government along with higher electricity tariffs due to greater reliance on furnace oil-based power plant as prime reason behind higher inflation in last three years.

Pakistan’s demand for petrol is likely to increase in the coming years. The demand for petrol will cross 8m tonnes by 2019-20 from the current 4.73m tonnes, according to one estimate. The inflation goes up due to increase in petroleum products prices, electricity and gas prices. The government will not be able to afford subsidizing petroleum products for longer. It has no choice but to continue taxing petroleum, as it faces rising fiscal deficit, which will have to be made up for by printing money through the State Bank, itself the single biggest cause of soaring inflation in the country. The government levies taxes at four different stages of the petroleum chain. It collects customs duties on the landed price of oil, which itself includes a sales tax levied at the import stage. Then it collects excise duties and then adds another sales tax at the domestic sales stage. Critics propose levying the tax only at one stage which would be when the oil lands at the country’s ports from abroad. The increase in oil prices also causes a rise in receipts for general sales tax (GST).

The abrupt increase in petroleum products prices further disturbs the industrial sector, especially manufacturers, already hard hit by high input costs including prolonged gas, power outage as well as weak rupee against dollar. The business leaders argue that higher cost of production, owing to abrupt increase in prices of petroleum products eventually leads to cut in export orders. After procuring commodities at higher rates from the wholesalers, the retailers pass on the burden of higher transportation cost to already hard-pressed consumers.

Some experts point to structural issues in the economy such as hoarding and artificial price increase of essential commodities by cartels and smuggling have also been responsible for high inflation in the country. The county’s strife-battered economy, combined with higher than usual prices for staples such as sugar due to alleged hoarding by producers, has drastically weakened the purchasing power of the country’s largely impoverished population of 170 million.

The surging debt is a burden for Pakistan because its Gross Domestic Product (GDP) growth is not faster than the rate at which debt is serviced. The cost of external debt is incurred in foreign currency, hence a surge in the debt burden depletes foreign reserves, triggers devaluation and increases the cost of debt.

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