IT’S a curious case of the rising rupee and falling inflation.

How can the local currency strengthen as the mighty dollar continues to pummel all major currencies: the euro, pound sterling, the yen, the yuan, and whatnot?

And how did headline CPI inflation lose four percentage points to arrive at 23.2pc in September, when our curries have fewer and fewer tomatoes and onions these days?

At least, this is how the ‘common man’ — be he on the street or on social media — and, of course, the opposition parties think. They have a nagging suspicion that those at the helm have resorted to “technical manoeuvring” — or, to put it simply, playing with figures.

Former economic adviser Dr Ash­fa­que H. Khan says he had been saying for a while that treasurers of commercial banks and members of forex associations were involved in “playing havoc on the exchange rate”.

“I have been demanding for the last several weeks that the SBP investigate and punish these criminals,” he said.

He referred to Bangladesh’s central bank, which had ordered the removal of treasury chiefs of five local and one foreign bank in August for allegedly raising the price of the US currency by preserving more dollars than necessary.

Therefore, citizens in Pakistan “are constrained to think the [banking] regulator itself and some politicians may have been part of this manipulation,” Dr Khan told Dawn.

He also found it strange that the rupee had appreciated against the dollar when the currencies of even more powerful economies had come under pressure.

“Have Pakistan’s foreign exch­a­nge reserves skyrocketed? Have Pak­­istan’s economic fundamentals bec­ome much stronger?” he wonde­red before going on to say that “none of this has happened and yet the rupee has appreciated against the dollar”.

“Isn’t it surprising? Is this the market mechanism or have these commercial banks or forex associations played havoc on the exchange rate in recent months?” he asked. “Both the regulator and the government of Pakistan have remained silent spectators over six months. Are they partners in crime?”

Newly appointed Finance Minister Ishaq Dar, who is known to favour currency market interventions to keep the rupee stable, stressed last week that the rupee had been regaining strength since his arrival last month and reiterated that the dollar would fall below Rs200 within days, as the prevailing rate “is not its real value”.

This begs the question: Why did the PML-N coalition government earlier allow the rupee to free fall and let it hit a record Rs240 against the dollar, when the same prime minister is now saying that Mr Dar will bring it below Rs200?

Besides, if the dollar was actually unreasonably inflated, will those who benefitted and earned billions through this manipulation - including banks - be taken to task?

Interestingly, the SBP governor, who was appointed by former finance minister Miftah Ismail, recently said that an inquiry had been launched against those who manipulated the exchange rate. But why did he remain silent before Mr Dar took up the reins?

Mr Dar has also played smart by reducing the petroleum development levy on petrol but increasing it for diesel, and now it may go well with the IMF as some room in the import value of fuel in the next quarter would help him raise it further.

The current regime has also come under fire in recent days over alleged manipulation of inflation data, which had been hovering around record highs before Mr Dar stepped into office. So has the government been creating feel-good figures?

Consider this: the rise in inflation was mainly derived from record electricity rates, which were also reflec­ted in the monthly bills of consumers who used fewer than 300 units.

Prime Minister Shehbaz Sharif then verbally announced a deferment of the fuel charge adjustment (FCA) for households using 200 units or fewer and later extended the exemption to 300 units.

This yielded two results: it came as a relief to millions of consumers and helped tame September inflation. The National Electric Power Regulatory Authority (Nepra) notified the deferment, which then became the basis for calculating the CPI by the Pakistan Bureau of Statistics (PBS).

But this shows just how the government can influence the methodology for inflation calculations; the PBS calculates inflation using, among other factors, electricity tariffs provided or notified on Nepra’s website.

The impact of prices on overall inflation varies depending on the weight of a particular item. In urban areas, the “housing, water, electricity, gas and fuels” head has a weight of 27pc, of which electricity is assigned 4.56 percentage points.

In August, the FCA was around Rs9.89 per unit against the average base power tariff of Rs17-18, meaning a total rate of around Rs28. So, the electricity charges in August skyrocketed 123.3pc on a year-on-year basis and 19.73pc on a month-on-month basis.

A rise in fuel prices also pushed up the CPI by 3-4pc in August’s inflation of 27pc. After the release of this figure, the government verbally announced that the FCA had been waived for consumers using below 300 units and would be adjusted in the next month’s bills.

Soon after this decision, the energy minister clarified that the FCA had not been waived but would be collected from consumers in instalments. The announcement apparently came to placate the International Monetary Fund (IMF) and keep the loan programme intact.

However, as of today, no official communication exists in this regard. A PBS official, who declined to be named, said: “We haven’t yet received any official record or statement from Nepra on the FPA waiver.”

Stats show that 88pc power consumers in Pakistan use fewer than 300 units a month. The FPA waiver was only for this bracket, while the remaining 12pc had to pay Rs30 per unit on average in August.

To calculate September inflation, the average tariff for 88pc consumers was considered at Rs7 to Rs8 per unit compared to around Rs28 in August.

The FCA of Rs9.89 for August along with another fuel adjustment of Rs4.45 for September were subtracted from August’s average tariff of Rs27 to Rs28 for this bracket. In September 2021, the FCA was Rs1.4 per unit.

As a result, electricity rates in the urban CPI fell 30.5pc on an annual basis and 65.3pc on a monthly basis to calculate September inflation.

The massive drop pushed annual inflation down from 27.3pc in August to 23.2pc in September. Nepra has yet to notify the mode of payments for August and September FCAs.

Published in Dawn, October 11th, 2022