Site icon Pakistan & Gulf Economist

Core-inflation, direct cash subsidy to exporters need to be focused

Khalil Ahmed
Core-inflation, direct cash subsidy to exporters need to be focussed

Interview with Mr Ashfaq Yousuf Tola – President, TOLA ASSOCIATES

[box type=”note” align=”” class=”” width=””]Profile:

Professional Accomplishments

Memberships:

Key Achievements:

Areas of Expertise:

Key Positions:

Federal Board of Revenue, Government of Pakistan:

Institute of Chartered Accountants of Pakistan:

South Asian Federation of Accountants:

Federal Tax Ombudsman:

Member Advisory Committee (South) (Present)

Pakistan Institute of Corporate Governance:

Pakistan Institute of Public Finance Accountant:

Institute of Cost & Management Accountants of Pakistan:

Karachi Club

Professional Experience

Pakistan & Gulf Economist had an exclusive conversation with Mr Ashfaq Yousuf Tola regarding inflation. Excerpts of the conversation are as follows:

According to the Pakistan Bureau of Statistics, the Consumer Price Index Inflation, on a year-on-year basis, has increased by 12.40% in Feb 2020 against an increase of 6.80% over a year ago. On a month-on-month basis, the CPI inflation has dropped by 1.09% in Feb 2020, mainly due to a reduction within the perishable food items, housing, water, electricity, and gas/fuels group. CPI inflation skyrocketed to a 9-year, which was recorded at 14.6% in January 2020. Urban food inflation decelerated from 19.5% in Jan 2020 to 15.2% in Feb 2020. Whereas, rural food inflation dropped from 23.8% in Jan 2020 to 19.7% in Feb 2020. The retail prices of essential food items are still too high for the common man, affecting their spending capacity. The ‘Food group’ which consists of perishable and non-perishable food items, has the highest weightage in the CPI, of 30.42%, has dropped by 2% on a month-on-month basis. Non-perishable food items, which have a bigger share in the food group, appreciated by 0.25%. Whereas, perishable food items have dropped by 12.60% in Feb 2020 over the previous month which accounts for a smaller weightage within the food group. However, housing, water, electricity, gas/fuels group, which is second largest group in the CPI, has dropped by 2.45%, which is surprising because of the fact that house-rent index remained unchanged, which has a negligible impact of inflation. Three factors are important to note. These are:-

  1. a) Out of 9 items within the housing, water, electricity & fuel group, six of them have increased on a month-on-month basis;
  2. b) With reference to freezing energy tariff at 7.5 cents for the export-oriented sector till June 2020, notification thereof is still awaited from the Government; and
  3. c) The impact of the drop in petroleum prices will be applicable for inflation for the month of March 2020.

Within perishable food items, the average monthly prices of essential food items of wheat flour dropped by 4.62% from Rs.47.20 per kg in Jan 2020 to Rs.45.05 per kg in Feb 2020. Similarly; chicken farm boiler decreased by 2.06% from Rs. 171 per 1 kg to Rs.167 per 1 kg; one dozen farm eggs decreased by 22.98%; and potatoes decreased by 13.43% in Feb 2020 over the previous month. The average monthly prices of tomatoes dropped significantly from Rs.102 to Rs.45 per kg, whereas, fresh milk prices have marginally appreciated, along with an increase in the price of onions to the tune of 2.40%, and a similar situation regarding increase of prices of garlic by 28.46% during the month. On a year-on-year basis, prices of the following have increased — onions by over 100%, pulse moong by 84%, potatoes by 83%, fresh vegetables by 62%, pulse mash by 51%, sugar by 37%, vegetable ghee by 33%, wheat by 30%, cooking oil by 27% and chicken by 14%. Supply-side shocks, poor price control mechanism, and lack of federal and provincial coordination have led to unprecedented levels of inflating food prices in rural and urban areas.

[ads1]

Inflation was recorded two years ago at a manageable and acceptable rate of 5 to 6%. This has unfortunately reached unprecedented levels of 12.4% thereby severely denting and restricting potential of our growth. A minimum level of inflation is essential for the economy, whereas, higher inflation and stagnant economic growth are counter-productive for the entire system. High growth with high inflation is also possible if the required economic output is outpacing the aggregate demand and expanding incremental productive capacity to its optimum levels.

The State Bank of Pakistan should target core-inflation instead of chasing down ‘headline inflation’ which provides reasonable space to cut the policy rate. According to PBS, the core inflation (excluding food and energy) in urban areas has increased from 7.9% to 8%, whereas, core inflation in rural areas grew from 9% to 9.4% in Feb 2020. The real-interest rates, which is the difference between core inflation and policy rate, stood at around 4-4.5%. This makes a strong case to shed the policy rate by 200 bps to stimulate economic growth.

The outbreak of coronavirus spreading across the globe has affected global oil prices, financial markets and weakened global demand. However, the federal government of Pakistan has passed on a ‘negligible’ impact to consumers, which will further reduce inflation in March going forward.

In our humble opinion, the Rupee must be revalued by 3% of its current value, to a dollar parity of Rs. 149-150, which will be in line with the pursuit of ‘hot money’ by the incumbent government. This will also not restrict the inflows of our foreign exchange reserves. In order to restore competitiveness of exporters with the rest of the world and boost exports, Federal Government must give direct cash subsidy to the exporters, and immediately notify the pending order regarding freezing of the electricity tariff of 7.5 cents(kWh), and gas at $6.5 per unit (million British thermal unit) for zero rated industries to restore confidence of the private sector, and stimulate exports of the country.

Exit mobile version