Ramazan, budget and prices

Ramazan has little effect on overall Consumer Price Index

In public perception, the holy month of Ramazan is associated with an unholy alliance of profiteers, hoarders and price manipulators. Similarly, the public perceives the month of budget presentation and approval as the high season of hikes and spikes in administered and other prices. This year the two fall roughly in the same month. How lethal is this combination likely to be? Researchers have studied the Ramazan effect on prices. Investigation of the impact of budgetary changes on prices is also a common pursuit of economists. The announcement effect of the budget, too, has been the focus of a number of papers. I suspect, however, that no study exists on the joint effect of the two. Their coincidence is so rare.

Researchers at the State Bank have focused on the Ramazan effect. In 2010, Akmal and Abbasi wrote a paper to show that Ramazan had little effect on overall Consumer Price Index (CPI), food and non-food price levels. This, according to them, could be due to the pre-Ramazan price hikes and government policy to regulate prices during Ramazan. The only exception was the prices of fruits and vegetables, the typical Ramazan items, the supply of which is constrained to meet the unusually high demand coming from a dissaving public. A paper by Bukhari et al in 2011 also confirmed that Ramazan is not the source of the highest seasonal change in the monthly CPI.

The conclusion flies in the face of daily experience of the ordinary public. Researchers look for seasonality caused by Ramazan in the CPI time series that follows the Gregorian calendar. The issue is that that this calendar cannot reflect variations caused by the Hijri calendar. Riaz Riazuddin, the current acting governor of the State Bank of Pakistan, has been working on constructing a time series based on the Islamic calendar. With M H Khan, he first wrote a working paper in 2002, Detection and Forecasting of Islamic Calendar Effects in time Series Data, and followed it up in 2005 for the SBP Research Bulletin. In his latest paper, Construction and Seasonal Patterns of Islamic Hijri Calendar Monthly Time Series: An Application to Consumer Price Index (CPI) in Pakistan, Riaz Riazuddin has attempted to get around this difficulty by constructing a series for a full cycle of 34 Hijri years or 408 months. This is not as good as a series based on data collected according to the Hijri calendar, but the results are still quite interesting.

He finds that seasonal monthly effects are present in Hijri CPI series, but its monthly mean price changes vary less than the Gregorian means. More important, the highest average monthly change occurs in the month of Sha’aban. This confirms the conclusion of the earlier researchers that price manipulation to profit from Ramazan happens before Ramazan. Most important, July is the month when the highest average monthly change occurs for Gregorian series. In other words, while the Ramazan effect pre-dates Ramazan, the budget effect post-dates June, the month when it is presented. In his words, the “emergence of Sha’aban with the highest price change is in accordance with the common experience of Pakistanis with the special onslaught of inflation prior to the holy month of Ramazan every year. Significant increase in Ramazan is not observed because prices are already largely adjusted upwards in Sha’aban.” On the Gregorian seasonal effects being the highest for July, he observes: “A strong possibility for July increase is the post-budget adjustment of prices every year.” Add to Sha’aban and July the pre-election spending spree by five governments, and pray for the achievement of the 6% rate of inflation targeted for 2017-18.

Published in The Express Tribune, June 3^rd, 2017.

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