The government introduced a series of measures last week that apparently set the stage for lasting inflationary pressures. Measured by the Consumer Price Index (CPI), the rate of inflation has already risen substantially to 8.7 per cent in February.

Important policy decisions included the withdrawal of corporate income tax exemptions, which will become effective on July 1, an iron-clad circular debt management plan for an automatic 34pc increase in average electricity rates and an increase in the minimum support price for wheat.

In its monetary policy statement last week, the State Bank of Pakistan (SBP) slightly adjusted its inflation expectations based on about Rs2 per unit electricity rate increase two months ago. “The recent increase in electricity prices will continue to manifest in headline numbers in coming months, keeping average inflation in 2020-21 close to the upper end of the previously announced range of 7-9pc,” it said, noting that recent inflation out-turns have been volatile, with the lowest reading on headline inflation in more than two years in January 2021 followed by a sharp rise in February.

According to SBP estimates, the recent increase in electricity tariffs and sugar and wheat prices accounted for about 1.5 percentage points of the three percentage-point increase in inflation between the January and February out-turns. In its previous policy statement in January, the SBP was of the view that “inflation is still expected to fall within the previously announced range of 7-9pc for 2020-21 and (the) trend towards the 5-7pc target range over the medium term.”

The circular debt management plan envisages the base electricity tariff will go up by Rs5.36 per unit (more than 34pc) to Rs21.04 per unit by July 2022

Soon after the SBP’s latest policy was out, the government announced increasing the wheat support price from Rs1,650 to Rs1,800 per 40kg, about 9pc rise. Estimates suggest that a 10pc increase in the wheat support price raises overall inflation by up to 3pc. The ministers have promised that despite an increase in the support price weeks ahead of its harvest, the price of wheat flour will be kept unchanged to provide relief to the people. In the past, such pronouncements were not really bankable.

Food inflation has remained generally high for long periods and has been pinching the people, particularly over the last two years amid a falling purchasing power of fixed-income groups. A disproportionate increase in the number of people living on social protection programmes is one of the indications.

The government also moved swiftly to promulgate presidential ordinances for tax exemptions and tariff increases. The Rs140 billion cost of withdrawal of a series of income tax exemptions on big businesses will ultimately shift to the various sectors of the economy and make way into the inflation trajectory.

To prove the seriousness of commitment, the government did not wait for the National Assembly to take up voting amendments to the Nepra law, which has already been passed by the standing committee on power. “In order to show the resolve of the federal government regarding the implementation of the Circular Debt Management Plan (CDMP), and streamlining the tariff determination process, it will be essential to introduce the amendments to the Nepra Act as early as possible. It is, therefore, proposed that said amendments may be introduced through an ordinance,” said a hurriedly moved summary of the Power Division that was immediately approved reportedly by the cabinet through circulation just two days after its usual weekly meeting.

The ordinance envisages “automaticity in the notification of such tariffs determined by Nepra” and enables “the GOP to impose surcharges on electricity consumers” and to “streamline the process of determination of a uniform tariff”. The Power Division said the ordinance was inevitable because the CDMP committed with the IMF assumed that “the principle of automaticity will have taken effect by the end of the instant month”.

The CDMP commits the base electricity tariff across the country to be further increased by a cumulative Rs5.36 per unit (more than 34pc) to Rs21.04 per unit (excluding taxes, duties, surcharges and other add-ons in the bill) by July 2022. It describes the mechanisms and initiatives to address the issue and suggests an action plan to control the flow of circular debt with a monitoring matrix”. This means charging about Rs900bn in additional revenue to consumers in 27 months as opposed to Rs334bn to be conserved through efficiency improvement.

This will be achieved through an increase of Rs1.39 per unit in tariff rebasing in June to curtail the flow to existing circular debt by Rs13bn within this year, followed by Rs126bn next fiscal year and Rs136bn the year after, with a cumulative impact of Rs276bn in two years. This will be followed by another Rs2.21 per unit increase in rates through another tariff rebasing in July 2021, involving the revenue impact of Rs199bn next year and Rs215bn in 2022-23. The cumulative impact of this rebasing in July 2021 has been worked out at Rs414bn.

Yet another Rs1.76 per unit increase will be made through tariff rebasing again in July 2022 to generate additional Rs176bn. The water-tight CDMP binds the Ministry of Energy and power regulator Nepra to issue tariff notifications for the above three rebasing exercises in upcoming June, followed by July 2021 and July 2022.

This is despite the fact that the Power Division has conceded that “more than 70pc of the circular debt was due to pending policy decisions”. It also conceded that the cost of electricity had reached a point “where the consumers have started switching to the alternate solutions”. The collection of bills from government customers will also be rationalised and subsidies will be on actual basis and paid according to schedule. The Power Division has committed recovery improvements of about 5.73pc to yield a total of Rs204bn in two years. It has also promised reduction in system losses by 2.12pc over the two years for savings of Rs130bn.

All this comes at a time the general CPI increased 8.7pc on a year-on-year basis in February against 5.7pc in the previous month and 12.4pc in February. Likewise, the sensitive price index or SPI inflation increased 11.9pc in February year-on-year as opposed to 7.7pc in January and 14.5pc in February 2020. Also, inflation measured by wholesale price index on an annual basis increased 9.5pc in February against 6.4pc a month earlier and 12.7pc in February 2020.

Published in Dawn, The Business and Finance Weekly, March 22nd, 2021