Raising prices of POL products by 11 percent effective 15 October has staggered a populace already reeling from an inflation of 9 percent in September with food staples, particularly wheat and sugar, witnessing a rise in prices even at government controlled Utility Stores Corporation — outlets used by government to extend subsidies to contain inflation. The government’s claim is that the rise in the prices of petroleum and products reflects international price of oil which is at present around 84 dollars to the barrel. Critics, however, point to two major facts that challenge or dispute this claim. First, the international price of oil is a lot lower than the 140 dollar per barrel available in the international market way back in 2008 when the domestic price was a lot lower than today. True that the government has reduced petroleum levy significantly since fuel prices began to rise internationally (a source of revenue that governments have increasingly relied on as a revenue source with the budget for fiscal year 2021-22 envisaging 610 billion rupees under this head) though sales tax has remained unchanged, yet to compare the price of petrol and its impact on the public with the price available in neighbouring countries is inappropriate because the purchasing power parity in dollar terms is markedly lower in Pakistan today than in our regional neighbours, including India, Bangladesh and Sri Lanka.
The spokesperson for the Finance Ministry noted that apart from the rise in global price of fuel, rupee depreciation also accounts for the price hike. This is certainly true as the rupee depreciated from 152 rupees to the dollar in May 2021 to over 172 rupees to the dollar today. Irrespective of claims in the 20 September 2021 Monetary Policy Statement that “since its floatation, the rupee has moved in an orderly manner in both directions and has depreciated by only 4.8 percent to date, much less than many other emerging market currencies over the same period,” the fact is that in the past four and a half months the rupee has depreciated by 13 percent.
Fawad Chaudhary, the Minister for Information and Broadcasting, tweeted that the government realizes that the salaried class is suffering from inflation and advised the private sector to increase salaries of their employees to help mitigate the effects of inflation. This advice may get support from private sector employees, perhaps the minister’s objective, but sadly it does not reflect even a rudimentary knowledge of economic theory which warns against raising wages as a means to combat inflation given the wage push inflation phenomenon: raising wages would raise the costs of production which would lead to higher prices than before. It is precisely for this reason that the International Monetary Fund had advised the government not to raise salaries of public sector employees in 2019-20.
The budget for the current year has raised wages of public sector employees, at the taxpayers’ expense, however this together with higher subsidies, may well raise the budget deficit, unless other expenditure items are curtailed, which is also a highly inflationary policy. Last but not least, the government’s ever-increasing number of experts on economics and finance need to share their views on the matter with Ministry of Finance officials so as to present a solution consistent with basic economic principles.
