The zero-rating of fossil fuels in the sales tax has been maintained, while the rollout of the Petroleum Development Levy (PDL) has been halted. The best part is that these choices appear to have been made in close collaboration with the IMF. If Dar intends to use the opportunity created by this good news bolstered by inflation figures that appear too good to be true-to pivot toward lower interest rates and higher growth.
Finance Minister Ishaq Dar has arrived with a vengeance. The rupee gained around Rs 12 to the dollar between his nomination as finance minister and taking the oath of office. On Friday, he used the spotlight provided by his first media conference in Islamabad to announce a 5% reduction in pump prices for motor spirit, light diesel, high-speed diesel, and kerosene oil. Separately, the price of LPG (Liquefied Petroleum Gas) has been reduced by about 5%. The Pakistan Bureau of Statistics (PBS) has published its September inflation data as part of a monthly review of price indices and it would have us believe that the current shockwave of inflation peaked in August. Year-on-year Consumer Price Index (CPI) inflation increased to 23.2 percent in September, up from 27.3 percent the previous month, with a 1.2 percent monthly decrease. This month’s Sensitive Price Index (SPI) increased by 28.6 percent year on year, compared to 34.0 percent the previous month, indicating a 1.4 percent month-on-month decrease. The Wholesale Price Index (WPI) increased 38.9% year-on-year in September, down 2.3% from the previous month’s 41.2 percent.
All of this is good news for a country reeling from historic inflation and recently devastated by a massive natural disaster. Energy price cuts, in particular, should be welcomed because they will help to cool raging inflation. However, the government’s motivation for instituting these measures at this time must be questioned; some functionaries in the PML-N-led government are eager to spin these developments as accomplishments of the new finance minister, who has only recently taken over the Ministry. Also, let it be noted that PBS’s inflation figures are far too good to be true. Some hints emerge after a cursory examination of the data. A 20kg wheat flour bag, for example, has been quoted at Rs1,095 in Islamabad, Rs2,100 in Karachi, and Rs1,247 in Peshawar. Because wheat flour costs Rs2,200 per bag in Islamabad, this is clearly an error on the side of a lower CPI figure. Similarly, the data used shows a 31.4 percent decrease in “Electricity Charges up to 50 Units” in September compared to August.
Returning to energy prices and passing on the impact of falling international oil prices to consumers appears to be a positive step. The zero-rating of fossil fuels in the sales tax has been maintained, while the rollout of the Petroleum Development Levy (PDL) has been halted. The best part is that these choices appear to have been made in close collaboration with the IMF. If Dar intends to use the opportunity created by this good news-bolstered by inflation figures that appear too good to be true-to pivot toward lower interest rates and higher growth, he may be taking a risk because any movement in that direction will almost certainly bring back the twin deficits, putting pressure on our already shaky foreign reserves and sending the rupee into a tailspin all over again. Such a course of action is neither tenable nor sustainable for a country reliant on the goodwill of the rest of the world, especially given that our economic outlook is entirely dependent on the availability of adequate external financing in the face of challenging domestic and global economic and political conditions. As a result, the jury is still out on whether the new finance minister is steering the economy in the right direction. Mr. Dar must make it appear right in the coming months and weeks.
