Soaring inflation in Pakistan

Inflation in Pakistan continued to soar and has touched nearly five years’ high in February 2019. In line with expectations, the pace of inflation shot up to a 56-month high at 8.21% in February 2019, driven up by a significant surge in the cost of living on almost every front, including higher utility bills, increased cost of education and health care as well as rise in transportation and communication expenses.

The Pakistan Bureau of Statistics (PBS) reported on March 1, that inflation measured by the Consumer Price Index (CPI) accelerated to 8.21% in February 2019 compared to 3.8% in the same month of previous year.

The State Bank of Pakistan (SBP) has let the rupee depreciate by a massive 32% since December 2017 to Rs138.53 to the US dollar on Friday in a bid to push up exports and control imports, which will shore up declining foreign currency reserves of the country and help manage the balance of payments deficit. This also has a delayed impact on prices of goods.

PBS reported that transportation services became expensive by 13.32% in February 2019 compared to a drop of 0.43% in prices in the same month of previous year. Alcoholic beverages and tobacco became expensive by 13.21% compared to just 0.46% in the corresponding month of previous year. Similarly, housing, water, electricity, gas and other fuels became costlier by 11.55% against just 0.01% earlier; education cost 10.21% more versus increase of 0.16% earlier; cost of furnishing and household equipment maintenance rose 9.24% compared to 1.21%; communication became expensive by 7.77% compared to 0.05% and health care cost 7.76% more compared to 0.46% in February 2018.

Other goods including clothing and footwear, food and non-alcoholic beverages and miscellaneous goods and services became expensive in the range of 4.52-9.87%.

It mentioned that prices of tomato, ginger, beef, sugar, tea (Lipton), mutton, gur, ghee (loose), fish, moong pulse, eggs, cooking oil, rice, gram pulse, gram whole (black), fresh milk and wheat increased in the range of 3.21-179.40%.

Average rate of inflation for first eight months (July-February) of current fiscal year came in at 6.46% where transportation (up 16.81%) and education (up 11.61%) were the two largest categories, the PBS reported.

Core inflation – the non-food and non-energy inflation – continued to pick up pace in February 2019. It grew at almost six-year high pace of 8.8% compared to 5.2% in February 2018, according to the PBS and tradingeconomics.com. Core inflation has maintained the rising trend for the last nine consecutive months.

Affect government policies

The government may turn down the Senate’s proposal of 10 per cent increase in the salaries of all government employees as interim relief allowance due to the tight fiscal space.

The Senate in its proposals on Supplementary Finance (Second Amendment) Bill 2019 has recommended the National Assembly 10 per cent raise in the salaries of all government employees as interim relief allowance. However, sources in Ministry of Finance said that government is not in position to increase salaries of civil servants. “Prime Minister will take the final decision in consultation with finance minister,” said an official of the ministry. He further said that government was currently working to restrict the budget deficit by controlling expenditures.

The Pakistan government said, had already given massive relief to the salaried class by increasing the minimum threshold of income tax. The previous government had granted exemption of income ceiling up to Rs1.2 million from Rs400,000 per annum in the annual budget for the ongoing fiscal year. The downward revision in minimum threshold of annual income tax slab is one of the reasons behind massive shortfall of Rs191 billion in tax collection during first seven months (July to January) of the ongoing fiscal year. The FBR has collected Rs2.06 trillion during July to January period of the year 2018-19 as against Rs1.995 trillion of the corresponding period of the previous year showing growth of 3 per cent.

Future prospects

As per data from the Asian Development Bank, Pakistan’s GDP growth stands at 4.8%, lower than even Nepal (5.5%), reported Business Today. Pakistan’s latest GDP figures have slipped from 5.4% in 2017 and 5.8% in the following year. Standard & Poor’s had downgraded Pakistan’s long-term credit rating to ‘B-Negative’ and said the GDP growth rate would fall to 4% in 2019, then stay at 3.5% for the next two years and fall further to 3.3% by 2022.

And now Inflation, is the highest in the Indian subcontinent, including India, Bangladesh and Nepal. The foreign currency reserves have reportedly dwindled to around $7 billion, just enough to cover about one months of imports.

The recent monetary and fiscal (government) policies are likely to affect large scale manufacturing (like factories) and economic activity (business expansion) may slow down in the financial year ending June 2019. The economy is facing a double challenge. The government spending is much higher than its revenue, which results in a deficit (loss) of Rs2.2 trillion a year. On the other hand, our monthly imports are more than twice our exports. This double loss coupled with rising inflation is likely to “compromise the sustainability of the high real economic growth path”.a