Myth busting inflation in Ramadan
IT has been noted that prices tend to escalate during the month of Ramadan, with a general surge of 31.5 percent in recent months and several food items experiencing up to a 60% increase in prices from their pre-Ramadan levels. While stocking up may be a contributing factor towards higher prices, it does not play a pivotal role. There are structural inefficiencies in the supply chain of retailers and a lack of regional trade in Pakistan which causes a hike in prices. The present article aims to explicate the root causes of inflation and associated operational inefficiencies that impede its regulation.
This phenomenon is simply an application of the law of demand and supply which remains applicable during both Ramadan and Christmas, just as it does throughout the year. It is only when the demand for a product exceeds its supply that a disequilibrium arises, leading to fluctuations in price. Some local intellectuals have cited western countries where prices for certain goods remain unchanged or low during Ramadan, as an argument against the idea that prices increase during religious holidays in Pakistan. However, this explanation overlooks the fact that Muslims are often in the minority and may not be as well-off as the majority population in these countries. Conversely, during Christmas in these same countries, prices for certain goods often increase due to higher demand from consumers who celebrate the holiday, such as gifts, decorations and special foods and drinks associated with Christmas.
Similarly, during the holy month of Ramadan, certain food items and fruit are in high demand, particularly during the suhoor and iftar meals. Middle-class and lower-middle-class consumers tend to purchase these items on daily basis during Ramadan, even if they cannot afford them at other times, as this month holds special significance for them. In addition, well-off individuals and charitable organizations often donate food and fruit to those in need as an act of charity, particularly to the labour class working in metropolitan cities. This practice further increases the demand for specific food items and fruit during Ramadan by 30-40 percent, while the supply remains constant, leading to a disequilibrium in the market between demand and supply.
The State can overcome the challenges related to the availability of food items and fruit during Ramadan by bolstering its regional trade with neighbouring countries, including India, Iran, Afghanistan and China. By enhancing regional trade, Pakistan can potentially increase its access to a wider range of products, including cost-effective and high-quality food items and fruit. This would enable Pakistan to effectively address the supply-related issues during Ramadan and ensure a steady supply of products for the general public.
Regarding the solution in the domestic market, one approach that can potentially address the issue of high prices is to enhance the efficiency of the value chain of retailers and marts eliminating the intermediary role. In Pakistan’s big cities, several retail stores and marts, including Canteen Stores Department, Hyperstar, Al-Fatah, Metro, Imtiaz Super Market, Save Mart and Punjab Cash and Carry, have been established. Despite their establishment, their supply chain system could be further optimized for efficiency. By employing an efficient method for collecting materials from farms and production centres, these stores can ensure that they maintain sufficient stock levels and can source materials at reasonable costs. This optimization can subsequently lead to the reduction of prices, thus making products more affordable for the general public.
The Utility Stores Corporation has reported that there are over 4,000 retail stores located throughout the country. As it currently manages 108 of these stores, the CSD has become the second-largest retail chain in Pakistan. However, most retail stores in the country rely on intermediaries, particularly Sabzimandi and wholesalers, for their supply chain operations. These stores do not have their own farms and also lack a direct link with farmers. As a result, they have limited control over the quality and pricing of their products, as these factors are influenced by the middlemen in the supply chain.
Let us examine the example of Tesco, one of the largest retailers in the United Kingdom which maintains a complex and extensive supply chain that involves numerous suppliers, warehouses and distribution centres. In the backward chain, Tesco collaborates with thousands of suppliers worldwide to procure products, including farmers, manufacturers and distributors. It owns several large warehouses where products are received from suppliers and stored until they are required in stores. In the forward chain, Tesco utilizes various transportation methods to transport products from its distribution centres to its stores. Products are then stocked on shelves in Tesco’s stores and made accessible to customers. Tesco’s efficient supply chain allows it to provide less expensive products and make them available to a larger consumer base. This is possible because Tesco has invested heavily in its supply chain infrastructure. Nonetheless, retail stores in Pakistan own an efficient supply chain.
In a nutshell, regulatory bodies could concentrate on developing stronger economic connections with neighbouring countries to promote the smooth flow of goods across borders. This can assist in increasing the availability of food products, reducing transportation expenses and enhancing market competition, all of which can contribute to lower prices. An efficient supply chain of stores can also help manage inflation in food products which is frequently impacted by inefficiencies such as the involvement of middlemen and traders who add extra costs and complexity to the distribution process. By eliminating these intermediaries, retailers can decrease expenses and pass on these benefits to consumers. Moreover, by upgrading logistics and distribution channels, retailers can guarantee that food products are transported quickly and efficiently from farms to markets which reduces spoilage and waste.
—The writer is Assistant Professor (PhD Financial Economics) National University of Modern Languages (NUML), Islamabad
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