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AS a fallout effect of the drastic reduction in international oil prices, inflationary pressures have eased considerably in oil-importing countries, including Pakistan.
According to the State Bank of Pakistan’s (SBP) latest bi-monthly monetary policy statement, inflation remained ‘historically low during the second half of FY15,’ declining from 8.6pc in July 2014 to 4.5pc in June 2015.
A declining inflation reduces the overall cost of production and raises the purchasing power of the general public. But this falling inflation has not manifested itself in the general conduct of business of different segments of the economy.
No seller is ready to lower the price of his products when buyers argue that the rate of inflation has dropped. The sellers insist that their cost of production has not come down
Let us start with the government, which did not pass the full impact of the reduced petroleum prices to the general public despite its tall claims of rationalising oil prices in line with the international trends. Crude prices fell over 60pc, from about $110 per barrel in July 2014 to below $40 per barrel last Tuesday. Against this, the government reduced petroleum prices from Rs108 per litre in July 2014 to Rs78 per litre a few months back.
While international prices are falling continuously, the government is not prepared to further bring down domestic oil prices on the strange pretext of losing revenues. Since the realisation of revenue through levies on petroleum products is certain and prompt, the government is not ready to explore other avenues like increasing the tax base or economising its non-development expenditure. To make up for losses on this account, it increased the GST on petroleum products from 16pc to 19pc.
In other words, the general consumers are simply paying higher prices on account of non-payment and evasion of taxes by influential people, the same way that bill-paying electricity users are also paying for the defaulters.
However, the government deserves some appreciation for providing some relief to the general public when compared with other sectors of the economy.
The banking sector is one area where the impact of falling inflation is visible in the shape of reduced lending rates for different users of bank money. Following the sharp decrease of more than 300 basis points in the SBP’s discount Rate, commercial banks accordingly lowered their lending and deposit rates.
Currently, the Karachi Inter-Bank Offered Rate (Kibor) for 3-12 months is in the range of 6-7pc. And banks are charging 4-5pc over Kibor from their various clients, except farmers, to whom they provide the costliest credit. Loans to the agriculture sector are now being provided at Kibor plus 7-8pc. In the recent past, the SBP had shown a great deal of activism in enhancing banks’ quantum of agricultural lending.
A similar proactive approach from the SBP is also warranted to reduce the cost of agricultural loans at a time when prices of inputs have risen substantially. The growers have held demonstrations to voice their grievances about the higher cost of farm inputs in days of declining inflation.
The falling inflation has largely failed to manifest itself in the services and commodity sectors as well. This phenomenon is more pronounced in the education sector, where no educational institution has lowered its fees and allied charges. Last October, the Pakistan Medical and Dental Council (PMDC) allowed all public and private medical and dental colleges to enhance their annual tuition fees while keeping in mind the inflation rate. Inflation had started declining after October 2014 and reached its lowest level in the first half of 2015.
However, private medical colleges have enhanced the fees of their students by thousands of rupees this year. And this spree of charging enhanced amounts on the pretext of rising inflation is likely to continue for the annual tuition fee for 2016 as well.
In the commodities sector, the falling inflation has also proved toothless in denting the prices of items of daily use. The prices of wheat flour, sugar and meat — essential commodities in the CPI basket — have gone up. Similar is the case with fruits, vegetables and garments. Meat prices used to rise after Eid-ul-Azha mainly due to the reduced supply of animals. Surprisingly, these prices have risen by Rs50-100 per kg even before the start of the Eid season.
No seller is ready to lower the price of his products when buyers argue that the rate of inflation has dropped. The sellers insist that their cost of production has not come down. From the general level of prices of goods and services in the market, it appears that the country is passing through a high inflationary phase.
The above situation not only raises serious questions about the methodology of computing inflation indices in the country, but also hints at the presence of different economic groups and vested interests behind the non-responsiveness of our economy to a big economic stimulus originating from the unprecedented decrease in global oil prices and other imported commodities.
International oil prices are forecasted to decline further and are likely to remain in the range of $30-40 per barrel. Taking this as an opportunity, the government should first pass on a large part of the benefit, if not full, to the general public by bringing petroleum prices in the range of Rs50-60 per litre, and then take effective steps to ensure that the providers of different goods and services in the economy follow suit.
The writer is President, Institute of Banking and Business Learning Lahore.
Published in Dawn, Economic & Business, August 31st, 2015
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