Wage hike will lift inflation: Baqir

SBP chief says increase in minimum wage to Rs25,000 will lead to 2% rise in inflation

ISLAMABAD:

The government’s plan to provide solace to the inflationbitten segments of society faces execution challenges, as the central bank governor has warned about further rise in inflation by over 2% due to increase in minimum wages. The proposal to provide subsidised petrol to motorcyclists has also been termed impractical due to chances of leakages and issues in its implementation, sources in the Ministry of Finance said.

A brief meeting of the Economic Advisory Group was held on Friday in which State Bank of Pakistan (SBP) Governor Dr Reza Baqir shared his views on the proposal to increase the minimum wage to Rs25,000 per month, according to sources. Finance Minister Shaukat Tarin had recommended to increase the minimum monthly wage of labourers from Rs20,000 to Rs25,000. However, the SBP governor informed the meeting that the recent statistical analysis, carried out by the central bank, showed that increasing the minimum wage to Rs25,000 a month could result in over 2% increase in inflation rate over a period of one year, they added.

However, the finance minister stressed that Sindh had already increased the minimum wage and it might already have impacted inflation. A participant of the meeting inquired about the number of people who would benefit from the move but the central bank governor did not have the data for it. Baqir was not available for comments. The Ministry of Finance also did not release any statement after the meeting. The participant also raised the question of the impact of increasing interest rate on inflation reading. According to the central bank analysis, a one-percentage-point increase in interest rate will raise inflation by 1.3%.

The inflation rate rose to 13% last month – the highest level in the last two years and it was also the highest growth among South Asian countries. The ruling party had to face defeat in the first phase of local bodies’ elections in Khyber-Pakhtunkhwa due to soaring inflation and division within its ranks, forcing the government to review its strategy. In December, the finance minister admitted that the urban middle-income class was being squeezed due to inflation and he wanted to provide some relief.

Subsequently, Tarin floated four proposals in a meeting of the Economic Advisory Group last month to provide relief to the salaried class. He suggested giving fuel cards to the motorcyclists to enable them to receive subsidised petrol besides increasing the minimum taxable income threshold from Rs600,000 to Rs700,000 or Rs800,000 per year. However, sources said that it would be a tough task to secure the IMF’s nod for further enhancing the exemption limit as the global lender has already termed the existing limit above average for the developing countries. Sources also said that the proposal of provision of subsidised fuel cards to the motorcyclists was difficult to implement.

The government has not yet been able to roll out the subsidised food package for the deserving families under the Benazir Income Support Programme. The initiative was still at the stage of registration of vendors. The government had announced the provision of subsidised essential items to the lower-income groups and for the purpose, it decided to divert Rs40 billion from the existing budget of the Benazir Income Support Programme. The government has already backed off from its proposal to reduce taxes on edible oil. It had promised to cut prices to Rs290 per kilogramme, however, it is presently available in the market at Rs420 per kg.

The minister also proposed that the private sector should be encouraged to start internship programmes for new entrants in the job market and recommended subsidised plots to the middle-income group. Prime Minister Imran Khan also wants to bail out the lower and middle-income groups from the adverse impact of inflation and his office has asked for the additional budget of around Rs200 billion for the purpose.