Pakistan, like many other developing countries, has been facing inflation related challenges for years. Several factors contribute to inflation, and in the case of ours, these factors often include economic policies, external shocks, and structural issues.
The Sensitive Price Index (SPI) for the week ending November 16, 2023, recorded a notable increase of 9.95 percent. This surge was primarily attributed to the administrative decision to elevate gas prices by a substantial 480 percent. While the adjustment in gas prices was an integral aspect of the conditions stipulated in the Stand-By Arrangement (SBA) with the International Monetary Fund (IMF), it does not absolve the government of two crucial responsibilities.
First off, the government must acknowledge the growing necessity of addressing the sector’s current inefficiencies, even though the IMF highlights complete cost recovery as an economically feasible goal. This is essential in light of the typical consumer’s limited ability to withstand additional tariff hikes.
The power sector, currently burdened with a staggering circular debt of 2.6 trillion rupees and escalating daily, is entangled in contractual obligations signed with independent power producers under the CPEC. These obligations work against the interests of consumers and are exacerbated by persistent mismanagement in the sector.
Furthermore, the prevailing headline inflation, consistently hovering in the late 20 percent range for the past year, severely compromises the average consumer’s ability to meet essential expenses, as highlighted in the recent World Bank report citing a 40 percent poverty rate in the country. Any increase in tariffs is poised to push hundreds of thousands of average income earners below the poverty line.
Secondly, the most pronounced impact of the SPI rise is observed in the consumption group earning between 22,889 and 29,517 rupees per month, witnessing a high of 45.84 percent year on year. This necessitates budget cuts in other areas, potentially affecting crucial expenditures like school fees or health-related costs, posing long-term risks to the country’s economic growth.
Critics argue that the current strategy of passing on the economic burden to consumers, reminiscent of elected officials, is a cause for concern. The caretaker government, despite the seamless first staff level agreement with the IMF, has yet to embark on far-reaching structural reforms that are urgently needed. Instead of focusing on easily reversible administrative measures, caretakers should prioritize the implementation of structural reforms agreed upon with the IMF, steering away from politically motivated considerations that have hindered progress in the past.
