# **4.** **<mark>POLICY RECOMMENDATIONS</mark>**

<mark>With rising inflation and declining real purchasing power, policy makers have come under pressure to define a policy response that protects especially poor and vulnerable households against rising prices.</mark> <mark>In Pakistan – like in other countries – policy makers opted for general subsidies on fuel, utilities, and transport, which offered some relief to households. However, given the higher budget shares allocated by the richer households to fuel, utilities, and transport, general fuel subsidies were largely regressive, with a disproportional share of subsidies benefiting relatively richer households. In response to rising fiscal pressure, policy makers reduced general subsidies and switched to targeted social transfers through the social protection program BISP. Yet, by indexing the cash transfers to average inflation rates, the program could not fully mitigate the negative welfare shock arising from higher prices, also because inflation rates to the bottom of the welfare distribution were disproportionally higher. That is, ignoring inflation heterogeneity in deciding public transfers could increase inequalities when, in fact, these are intended to reduce the unequal effects of inflation. The same could be argued for pensions and wages. To rectify such regressive trends, policy makers must avoid measures that impose unsustainable fiscal costs and largely benefit richer households, such as energy relief price measures, and favor progressive policies, such as the reduction of import tariffs on sensitive food items consumed heavily by the poor.</mark> <mark>Beyond fiscal policy, this paper's findings also call for central banks to monitor differences in inflation patterns and trends between relatively poorer and richer households. Monetary policy should shift focus from welfare maximization of a representative household that is assumed to face average inflation to a set of representatives from the income distribution who face different inflation rates. In other words, inflation inequality should be included in the objective functions of the MP/SBP. Furthermore, episodes of rising inflation with a profound impact on households highlight the need for frequent and representative data collection. The Pakistan Bureau of Statistics collects price data on a weekly (Sensitive Price Index) and monthly basis (Consumer Price Index), but the data is only representative on the national level (and by rural/urban), which could hide a lot of heterogeneity in consumer prices beyond the national average. Increasing the number of markets could support more disaggregated price statistics, which also better reflect the experience of consumers. Moving forward, pro-active and data driven monetary policy making to support price stability objectives is imperative.</mark> <mark>Lastly, it is important for the government to continue efforts towards the introduction and continuation of targeted safety net measures to protect poorer households from the unequal effects of inflation, especially following shocks that effect food prices. This includes expanding existing programs under the BISP umbrella with clear targeting criteria, and adjusting the benefit levels through regular indexation.</mark> 12