PTI’s great inflation challenge
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Managing price hikes seems to be a key responsibility entrusted to Pakistan Tehreek-e-Insaaf’s fourth finance minister in two years. From 5.7 percent growth in consumer prices seen in January 2021, we have witnessed double digit growth – 11.1 percent in April 2021. This is not just a Ramazan effect as prices steadily increased even during February and March. A breakdown of this increase reveals that both food and non-food inflation continue to be on the upside.
Higher food prices have taken the government by surprise at a time when imports of notable items including wheat and sugar had already been allowed a long time ago. Non-food inflation increased despite the government resisting an increase in energy prices as had been earlier agreed with the International Monetary Fund (IMF).
As public uproar picks up, an independent evaluation is desired to assess the performance of four initiatives by the government to keep a check on prices. These include: the delivery of food and essential items through outlets of Utility Stores Corporation; operations of sasta bazaars; regular review by the revamped price committees at national and sub-national levels; digital technologies such as Government of Punjab app – Qeemat Punjab. It is important to assess if the above-mentioned measures and public expenditure devoted to these initiatives are rendering results or if changes to these mechanisms may be required.
The current management of buffer stocks of items such as wheat, sugar, and other essential commodities needs significant improvements and can have a stabilizing effect on future prices. In this regard, a past assessment is already available with the ministry of finance. The recommendations by Competition Commission of Pakistan (CCP) in their recent report, to check hoarding and cartelization could also help. The CCP has provided advice beyond just the management of prices but also to protect the consumers from malpractice, which could be in the form of quality variations.
While trade with India could not be mobilized due to political milieu in the region, it will be appropriate to explore deeper trade cooperation in both energy, food and other consumer items with Iran. This could stabilize both prices and supplies of food and oil in southern provinces of Pakistan.
Dr. Vaqar Ahmed
In the past, we have also noticed that price hikes in food items due to some seasonal shortages were overcome by procuring additional supplies from neighboring India. The disruption of normal trade at the Wagah-Attari border has however closed this option as well. While trade with India could not be mobilized due to political milieu in the region, it will be appropriate to explore deeper trade cooperation in both energy, food and other consumer items with Iran. This could stabilize both prices and supplies of food and oil in southern provinces of Pakistan.
Role of the civil service remains pivotal. The provincial chief secretaries could put in place a real-time price monitoring mechanism. The prices and quantities available for daily-use commodities may be verified through sources other than the public sector. The prices from both official and independent sources could appear on an online dashboard in real-time for all districts. Explanations from relevant parties could be demanded if any violation of the official price list is observed.
To provide temporary relief in energy prices, a complete review of taxes levied on oil, gas, and electricity may be undertaken, and space to scale back on some of these taxes may be created. These measures will require consultation with FBR before negotiating a review with IMF. The dollarization seen across the energy supply chain needs to be scaled back gradually. All future contractual agreements in generation, transmission, and distribution of energy should be in Pakistani rupee. An appreciation in local currency should in theory result in lowering of some power sector costs for the next quarter.
There is a variance between winter and summer demand of power. Fixed charges rise due to increasing capacity and low demand. The demand-increasing incentives, for example, a decrease in winter tariffs could be introduced. The under-utilization of capacity during off peak hours can also be reversed through correct incentives. A more frequent review of the industrial tariff can also be an answer. A slowdown in the induction of new capacity may be considered through policy measures.
The capital expenditure requirements and stringent credit terms in the power sector need to be rationalized. In the short term this is possible through increasing the repayment period as well as changes to interest rates faced by power sector projects. NEPRA’s support will be required to check the high operation and maintenance charges claimed by some independent power producers (IPPs) which can be corrected immediately in exchange of the upcoming release of payments to these IPPs by the government.
As the prime minister is keen to review IMF terms and conditions with the objective of keeping consumer prices low, it will be timely to suggest that targeted subsidies for the poorest of the poor in both food and energy sector should continue to stay for the medium term. However, targeting mechanisms need drastic improvement so that only the genuine are benefited.
- Dr. Vaqar Ahmed is joint executive director at the Sustainable Development Policy Institute (SDPI). He has served as an adviser to the UN Development Programme (UNDP) and has undertaken assignments with the Asian Development Bank, the World Bank, and the Finance, Planning, and Commerce Ministries in Pakistan.
Twitter: @vaqarahmed
