World Bank expects the inflation rate to rise to 6 percent by the end of 2017-18
Inflation refers to price rise of important essential commodities like wheat, flour, milk, meat, medical services and other essential services of life etc. Inflation affects the whole social framework of society including economy of the country, production and political environment. Inflation is a deadly disease for developing economies as it imposes high cost on economies and societies.
Inflation rate in Pakistan averaged 7.79 percent from 1957 until 2018, reaching an all-time high of 37.81 percent in December of 1973 from a record low of 10.32 percent in February of 1959. Inflation i.e. Consumer Price Index (CPI) has contracted at 4.4 percent in January 2018 as compared with the increase of 4.6 percent in the previous month. CPI inflation general increased by 4.4 percent on year-on-year basis in January 2018 as compared to an increase of 4.6 percent in the previous month and 3.7 percent in January 2017.
Pakistan has been experiencing a landmark low in the rate of inflation in recent years. It has fallen steadily from 17 percent in 2008-09 to less than 3 percent in 2015-16, rising marginally to 4 percent in 2016-17. The major factor contributing to this is the nominal stability in the exchange rate combined with a big fall in international commodity prices of 42 percent since 2014.
The global price of oil has declined globally by almost 56 percent since 2014. This has been communicated partially to lower domestic prices of petroleum products.
Recent trends in the rate of increase in the consumer price index follow the same pattern. The first four months have seen an average monthly rate of inflation, on a year-to-year basis, of 3.8 percent. In particular, food prices on the whole have shown hardly any increase. The ‘core’ rate of inflation, excluding food and energy prices, has exhibited a modestly rising trend. It was 4.2 percent in 2015-16 and 5.2 percent in 2016-17. During the first four months of 2017-18 it stood at 5.5 percent.
Other factors which have restricted inflation are the controlled rate of monetary expansion annually of about 13 percent during the tenure of the IMF program. Currently, even though the rate of inflation in Pakistan is very low it is still above that of countries like India, Indonesia, Philippines and Thailand. The two noteworthy exceptions are Turkey and Egypt, with rates of inflation of 11 and 32 percent respectively.
The SBP, IMF and the ADB have all made similar projections of the average inflation rate of 4.5 percent to 5 percent for 2017-18. The World Bank expects the inflation rate to rise to 6 percent by the end of 2017-18. Given that the inflation rate was 3.8 percent in the first four months, the expectation is that it will rise in the latter part of 2017-18 to between 4.5 percent and 5.5 percent.
Recent events may have added substantially to inflationary pressures. With the rise in international oil prices, the government has raised petroleum prices sharply. As elections approach, the government will pass on the price increases on to consumers or it will start adjusting downwards the GST rate, especially on HSD, to reduce the price shock
Expectations of future oil prices have been raised substantially by the earlier agreement between Russia and Saudi Arabia to restrict their oil exports. The price of oil could rise by over 15 percent during the next one year. The other key factor relates to the policy that will be followed with regard to depreciation of the rupee in coming months.
The historical experience is that the rate of inflation rises on average by about three percentage points due to a depreciation in the value of the rupee by 10 percent. The expectation of a big once-and-for-all devaluation will increase if the foreign exchange reserves get depleted further.
In 2016-17, borrowing from the SBP approached Rs 900 billion. This year it could rise to well above Rs 1 trillion, thereby putting pressure on the rate of expansion of the money supply. Inflation may, unfortunately, start rising substantially once again from the very low rate currently.
The State Bank of Pakistan observed that people are complaining for the last several months that price-hike was making their lives sad. It is becoming very difficult for a common man to make both ends meet. The government is preparing to present next year financial budget as the general election is approaching.
According to the government the price of common commodities are stable even though different institutions including the Federal Bureau of Statistics are claiming otherwise. The SBP has warned that inflation is all time high in two years and steps should be taken to address the worsening situation.
Government claim about price stability is contradicted by huge rise in prices of almost all items of daily use including wheat flour, pulses, edible oil and milk besides vegetables and fruit. Rice in prices has also witnessed a jump in the last few months.
Industrialists and manufacturers including pharmaceutical companies have also increased prices of their products especially in the backdrop of rising prices of petroleum products whereas service providers too have increased their rates.
According to data released by the Pakistan Bureau of Statistics inflation has steadily been on the rise. High inflation rates are regarded harmful to economy in many ways. During high inflation rates companies can’t make budget for long-term and it affects production. It disturbs them their future planning and discourages the investors to invest. The other negative aspects inflation cause to increase invisible tax.
The State Bank has been very keen in listing almost all the factors which increases the inflation. The government should take the present situation seriously and should bring it down to a low level. Remedial measures should be taken as price hike is playing devastation with budget of the people in the absence of any corresponding increase in salaries and relief for the poor.
Inflation measured through Consumer Price Index (CPI) has recorded at 3.8 percent in February 2018 as against the same month of the previous year, according to the latest data of Pakistan Bureau of Statistics (PBS).
The inflation had recorded at more than 4 percent during last three months (November to January). Due to increase in inflation, the State Bank of Pakistan had raised the interest rate to 6 percent to pre-empt overheating of the economy and inflation breaching its target rate. The central bank has also warned that inflation would increase in the months to come due to impact of rupee depreciation and rising international oil prices.
The federal government is continuously increasing the petroleum products prices from last several months. Apart from the SBP, the economic experts also believed that rising oil prices would fuel the inflation rate. The government on once again increased the price of petrol by Rs3.56 per litre, high speed diesel by Rs2.62 per litre, superior kerosene oil Rs6.28 per litre and light diesel oil by RE1 per liter for the month of March. The increase in oil prices would increase the transportation charges, which directly impact the prices of basic food commodities.
The CPI-based inflation was recorded at 3.84 percent during first eight months (July-February) of the current fiscal year. The government and the SBP believed that the average inflation for the current financial year is projected to fall in the range of 4.5 to 5.5 percent, end of fiscal year-on-year inflation is likely to inch towards the annual target of 6 percent.