Inflation has become an unmanageable and uncontrollable phenomenon in Pakistan. It is assuming a snowball effect and touching new peaks. The government and the economic managers seem to have no writ on the mafias and appear to be merely helpless spectators with no solutions and control, leaving the poor and the down-trodden at the mercy of none. Even the advisor to the Prime Minster on Finance, after the talks with IMF on November 01, 2021 showed his inability, stating “inflation was a global issue”, and “the prices of commodities in the world are not in my control”.
It appears that the advisor has forgotten that as finance minister he was head of the Economic Coordination Committee (ECC) of the Cabinet, with one function being to monitor and control the prices of essential commodities. Apart from this, the incumbent replaced the earlier finance minister to collect revenues and get the country out of the ruthless conditionalities of the IMF pertaining to the increase in energy tariffs and POL prices which are directly causing inflationary impact. The state of Pakistan’s economy and the perception and measures being taken to control inflation reveal the government’s poor comprehension of the issues.
The Federal Bureau of Statistics maintains and releases data periodically. However, what this jargon of indices and data means to a consumer cannot be measured in real terms. Some basic questions in this regard which need to be answered and understood are: (i) Is the inflation due to inadequate monetary and fiscal policies? (ii) Is it due to increase in the cost of inputs, raw materials, energy tariffs and POL prices, etc.? .ii) Is it due to over-profiteering? (A normal rate of profit is left to the equation of demand and supply and other market forces). (iv) Which government departments are responsible for controlling and checking prices? (v) Is over-profiteering being adequately taxed, and (vi) What measures. if any, are these departments taking to control the price hike?
Economists would define the prevailing inflation as “cost-push inflation”, as with sluggish economy growing at a low growth rate and unemployment. There could be no “demand pull inflation”. The other logical classification could be “artificial hyperinflation” created by some of the business enterprises due to enormously high profits and with income going unaccounted for and untaxed. This article focuses on the artificial hyperinflation resulting from colossal untaxed income mainly due to poor government control, awful governance and economic mismanagement.
A careful perusal of the Government Rules of Business reveals that the ECC, the National Tariff Commission (NTC) and the Competition Commission of Pakistan (CCP) directly or indirectly control prices and over-profiteering. The provincial governments also have a role in controlling over-profiteering. The ECC, which meets every week, is primarily concerned with demand and supply and the prices of essential items like wheat, sugar and other relevant products. Section 12(ii) of the National Tariff Commission Act 2015 explicitly states that while examining a proposal for tariff protection / overall tariff rationalization and making recommendations to the federal government, the NTC has to satisfy itself that the additional cost, of tariff protection / assistance, to the consumer will not be excessive. The CCP, as per the Competition Act, 2010 is responsible to provide free competition of commercial and economic activity to enhance economic efficiency and to protect consumers from anti-competitive behaviour. Undue profit resulting from cartels or monopolistic situations cause over-profiteering on many local and imported edible items and other products as the powerful business groups control the prices and markets of which the CCP is either totally unaware or has closed its eyes.
Over the last few years, the government has considerably reduced the customs duty on imported raw material and most of the raw material now attract duty rates as low as 5% to 10% under a cascade tariff structure. Moreover, the products attracting 3% customs duty rates have been reduced to zero rate of duty in the budget for 2019-20. Besides, most of the raw materials are being imported from China at highly competitive prices and are mostly under-invoiced. Yet no reduction in the domestic prices has been witnessed nor has the benefit of the reduction in the import duties been passed on to the consumers. On the contrary, prices are increasing day by day. The government seems to have no account, control and check on these issues.
The government’s irrational tax measures announced in the fiscal budget for 2019-20 are also unduly causing inflation both for industrial as well as individual consumers. Levy of regulatory customs duties on cotton and polyester filament yarn coupled with arbitrary and unlawful levy of anti-dumping duties are pushing up the cost of production for not only exporters but for local consumers also. Restriction of import procedures for import of used automobiles, etc., have also multiplied the inflationary impact. The same is the case with the large number of finished imported products and inputs in the steel sector, etc., which have provided an unjustifiable opportunity for the local manufacturers to raise the prices of their products causing artificial hyperinflation.
Another major and basic reason for inflation is arbitrary and illegal POL price fixation. The National Accountability Bureau (NAB) conducted a detailed inquiry in 2006 on the POL Pricing Scam and identified at least ten legal aberrations resulting in exorbitant profits for the oil marketing companies, dealers and oil refineries. It is argued that in the mixed or free economies it is the market mechanism that determines the price level on the basis of demand and supply. But in these countries the economic system is well documented, consumers are educated and understand their rights. Moreover, strong consumers’ associations are there to protect their rights both with respect to quality and the price of goods.
The macroeconomic instability resulting from uncalled for increase in interest rates, in the recent past, depreciation of PKR and irrational levy of regulatory customs duties and FBR’s inability to check and control concealment of colossal profits and evasion of taxes and duties and economist’s ineffective measures to control inflation has taken it to an unmanageable point.
The best way to check and control the prices of these and other products is to get the cost of production verified and if required should be appropriated. The adequate method could be to take the value of raw materials / inputs and conversion cost plus general and other expenses and add a normal rate of profit to it as added in similar economies. This information is available with some of the government departments and also on internet around the world.
The FBR has recently determined the cost of production of sugar at Rs. 70 / kg which recently touched Rs. 140 / kg in some parts of the country.
The PM’s relief package announced on 3rd November, 2021 will provide 30% discount on ghee, flour, and pulses to 130 million people for six months. There could be no other absurd and ridiculous measure than the one announced under the relief package. Consequently, the sugar mafia immediately increased the prices of sugar to get more subsidy. This trend and practice would now be adopted by producers and suppliers of other essential commodities to increase the prices in order to qualify for targeted subsidies.
With half the population living below the poverty line, high rate of unemployment and considerable reduction of upfront cost of raw material, inflation in Pakistan can by no means be attributed to demand pull and cost push factors. The economic managers of the country need to come out of the theoretical economic rigmarole and develop a practical understanding and educate themselves on the issue of artificial hyperinflation, which has been created by huge unaccounted for business profits going untaxed. The government can rationalize the afore-mentioned legal and economic aberrations and get the nation out of the clutches of artificial hyperinflation.
