Karachi : The Policy Advisory Board of FPCCI strongly urges that inflation is cost-pushed and policy rates have proved to be an ineffective tool to control inflation. In any case, the core inflation is still lower than the policy rates and a 100 basis points (bps) reduction in the policy rate is proposed in the upcoming monetary policy committee meeting.

Mr. Irfan Iqbal Sheikh, President FPCCI, said that the central bank’s policy of tackling inflation through policy rates is playing havoc with industrial and business activities. SBP needs to classify the inflation into cost-pushed and demand-pulled parts; and, decide in favour of the overall benefit to the economy rather than keep pursuing a failing strategy.

The recent Consumer Price Index (CPI) data for May 2023 reveals general inflation has touched concerning 38% while core inflation stood at 20%. Pakistan has been facing a persistent challenge of high inflation due to supply-side bottlenecks, rupee depreciation and multiple rounds of surge energy prices in line with IMF conditionalities. Despite the cumulative rate hike of 1,125 bps from 9.75% to 21% between March 2022 and April 2023, the price growth momentum remains high during the said period. Raising the policy rate has proven to be ineffective in curbing the persistent inflationary pressure while exacerbating unemployment. The FPCCI believes that these rate hikes have contributed to financial instability and further fueled inflation. Increasing production costs have led to declining business revenue, negatively impacting both employment rates and the well-being of the masses.

The consequences of record-high interest rates and unprecedented inflation are evident in the private sector, with conventional banks’ advances to the private sector (business) falling by 85% to Rs128 billion in July-April FY23 from Rs861 billion in the same period last fiscal year. This decline reflects a slump in business activities attributed to import restrictions. As of April 2023, the overall credit extended by the SBP and commercial banks to the government accounted for 67%, while the share allocated to the private sector was only 33%. The Large Scale Manufacturing (LSM) output remained considerably below its potential. During July-March 2022-23, LSM registered a decline of 8 percent when compared with the same period last year. In the backdrop of expensive credit, political unrest, and lack of access to imports amid the dollar liquidity crunch, the country witnessed a contraction in the manufacturing output, creating further unemployment and increasing inflationary pressures.
To promote price stability, FPPCI emphasizes that the SBP needs to break the inflation rate into cost-pushed and demand-pulled. It is recommended that the SBP should target core inflation non-food non-energy (NFNE) for operational guidance. The SBP needs to strip out volatile changes in particular prices to distinguish inflation from temporary fluctuations in inflation. Efforts need to be made to control price manipulation and hoardings in liaison with the respective federal and provincial government departments. An active and efficient Competitive Commission of Pakistan (CCP) and effective price control mechanisms also need to play their due role.