Jan 07 - 13, 2008

Country wise shortage of virtually all the commodities became a perturbing factor for the government also after the assassination of Benazir Bhutto. Consumers, already complaining about higher prices, have to face a situation where basic food items were not available. Not only that transportation of the goods remained suspended but shops also remained closed for more than three days.

The key factors adding to the miseries of common man were closure of petrol pumps, public transport, shops and Pan Khokas. During this period atta was sold at a rate as high as Rs 32 per kilo, eggs at Rs 70 per dozen, Rs 100 mobile phone card at Rs 150 and the list continues. It may be said that the situation was exceptional and shopkeepers also behaved exceptionally. However, it may not be wrong to say that the situation was not exceptional because vendors never miss a profit making opportunity be it atta or medicines.

Barring this extraordinary situation, it may not be wrong to say that the purchasing power of consumers is on the decline for the last five years. Though, there has been increase in per capita income, higher inflation rate has been eroding purchasing power. The number of people living below the poverty line is on the rise and the worst hit group is salaried people. It is deplorable that a number of people even do not get minimum salary stipulated by the Government of Pakistan.


The hike in prices is universal because of rising crude oil prices. Lately the prices touched US$ 100 per barrel but started receding shortly. Though, OPEC members are often accused of not increasing the daily output, it is on record that fund managers are responsible for the record crude oil prices. In fact the fund managers invest in crude oil, gold, US Dollars and the flow of funds depends on the movement of prices.

As the US Dollar has remained under pressure and touched the lowest level against the Euro the fund managers have been reshuffling investment between crude oil and gold. On top of this has been the US stance to keep crude oil prices above US$ 50 per barrel to keep alternate sources of energy economically viable.

The adverse impact of skyrocketing crude oil prices on Pakistan is evident in many ways. The first and the most disturbing evidence are widening trade and current account deficits. Despite inflow of billions of dollars foreign direct investment and remittances, Pakistan's foreign exchange reserves are constantly under pressure. Though, the exchange rate has not started showing signs of volatility, sooner or later the situation can go out of control, especially if crude oil prices continue to hover above US$ 80 per barrel and probability cannot be ruled out completely.


The impact of higher POL prices, though not completely passed on to the consumers, is acting as double-edge sword. On the one hand it has reduced the collection of Petroleum Development Levy to almost zero and on the other hand the government has to pay billions of rupees to oil marketing companies to keep POL prices at the desired level.

The reduction is revenue collection forced to the government to initially cut the developmental expenditure and subsequently to indulge in massive borrowing to meet the budgetary deficit. Any curb on developmental expenditure disrupt the ongoing projects pertaining to infrastructure, health, education and social welfare.

When the government indulges in massive borrowing from the central bank or the commercial banks the worst impact is more and more borrowing to meet the debt servicing requirements. This pushes the borrowing far beyond the target specified in the budget.


The central bank has been following strict monetary policy to contain inflation, which included gradual increase in interest rates. However, the policy has failed in containing rate of inflation in the country. The worst impact is evident in the shape of declining trend in the fresh investment by the private sector and rising quantum of debt servicing of the government.

The country desperately needs fresh investment as well as BMR to produce exportable surplus as well as create new job opportunities to bring down the level of unemployment in the country. However, the business community does not feel comfortable in making new investments because of ongoing political unrest in the country and eroding competitiveness. The worst impact of political unrest was evident from the hooliganism created after the assassination of Benazir Bhutto.

According to initial reports the losses emerging from burning of vehicles, public transport, manufacturing units, bank branches and petrol pumps are estimated around Rs 100 billion. Some of the assets may carry comprehensive insurance but nearly 90% of these were not insured. The worst hits are small, medium and micro enterprises. It may take months and require billions of rupees to make these enterprises fully functional.


Most of the financial institutions are facing rise in delinquent loans due to rising interest rates. Industrial and commercial entities are finding debt servicing a difficult task. On the one hand competitiveness is eroding and one the other hand competition in global markets is becoming fiercer. The common complaint is that government is not doing enough to bring down cost of production and cost of doing business. The erosion in competitiveness is due to inflation being fueled by rising POL prices and hike in interest rates.

As regards consumer finance the situation is worse because of a number of factors. Most of the funding has been done on KIBOR plus basis. With the increase in KIBOR the monthly installments are on the rise. But the real issue is eroding purchasing power of individuals. With the rise in the cost of food items, rentals, utility bills etc. the purchase power of salaried class has shrunk substantially.

These are the people who had acquired the largest percentage of consumer and mortgage finance. It is becoming almost impossible to meet the ends with the rise in the cost of every item from onion to pulses and from petrol to school fee of children. Some of them, especially in Karachi, used to do part time jobs but traffic jams and increasing demands of employers. Now the average working hours for an ordinary worker to the CEO are roughly 10 to 12 hours and added to this is traveling time to/from office.


An outcome of the growing delinquent loans is that banks are getting shy in extending new loans. This is evident from declining advances to deposit ratio. It is true that advances are growing but certainly at a pace much slower than the rate of growth in deposits. The situation puts the banks in "sellers" market' and they are not ready to improve return to deposits.

It is on record that the average banking spread is 7.5% in the country, a little lower for the smaller banks. Since ample liquidity is available in the markets banks are least interested in mobilizing more deposits, in fact now they do not entertain small depositors, by stipulating minimum balance requirement at Rs 10,000.

It may not be wrong to say that there is no incentive for saving in the country. To begin with it is very difficult for people to save due to shrinking purchasing power and even if any amount is left, investment options are very few, particularly for the small investors.

Lately, banks have posted handsome profit but return to depositors was not improved. However, banks declared handsome dividend among the shareholders. However, the situation will not be the same for the year ended 31December 2007. The banks have to meet enhanced paid-up capital requirement as well as make additional provisioning against NPLs as per new rules. This means that shareholders would also receive lower dividend.


Containing the menace of inflation is not an easy job in a country like Pakistan, suffering mainly from cost pushed inflation. Therefore, the strategy to contain inflation has to be radical. Measures have to be taken keeping in view the macro situation and steps have to be industry/sector specific.

Calendar year 2008 has already started and the central bank is due to announce Monetary Policy Statement for January-June period. Enough is enough and now it is the time to ease the policy. To begin with the central bank should curtail discount rate as well as markup rate on export refinance. The reduction in interest rate is expected to usher in a new phase of investment.

It is becoming evident that crude oil prices would continue to hover above US$ 70 per barrel, to facilitate the countries to develop alternate energy resources. One of the globally acceptable fuels is bio fuel, blending of alcohol with petrol. Pakistan is capable of producing huge quantity of alcohol a by-product of sugar. While most of the countries use some cereal for fermentation, Pakistan is blessed with millions of tons of molasses to be used for the production of alcohol.

Pakistan is also blessed with trillions of tons of coal. This treasure has to be exploited at the best to become a substitute for furnace oil and gas being used for power generation. Use of coal will help in containing country's import bill and generating electricity at much lower cost. This would also help the industries in containing cost of production and improving competitiveness.

Cost of power generation can also be contained by enhancing hydel power generation. To add new hydel generation capacity, more dams have to be constructed. Construction of dams will help in achieving the twin objectives, ensuring water supply through out the year and generating electricity at much lower cost.

The policy planners need to give focused attention to agriculture sector for enhancing production and productivity. Improving yield of wheat, rice, cotton and sugarcane will help in achieving higher production and optimizing cost of production. If the country achieves self-sufficiency in these produce it could save millions of dollars being spent on the import of these commodities. And achieving surplus production will help in boosting exports and bridging trade deficit gap.

One of the reasons for higher electricity tariff is out of proportion T&D losses of WAPDA and KESC. These losses cannot be brought down without removing the incentive for theft higher tariff, which cannot be reduced unless cost of generation is reduced. It is long drawn process but objective can be achieved by making focused efforts.

Having suggested various efforts and measures it is necessary to reiterate that Pakistani's should also lead simple life. The credit card culture has brought down savings to dangerously low levels. It is true that consumer finance allows the borrower to use the product by making a small down payment, but very few people understand the amount and duration of the commitment. If the borrower do the proper home work for calculating their payment ability, the situation could be very comfortable.

Along with this there is a need to develop consumer protection groups to resist profiteering motive of manufacturers and vendors. Ironically, in this country every one complains about inflation, but never tries to resist from buying at inflated prices. Unless pressure groups are developed and consumers learn to refuse to buy products at higher prices, the prevailing situation cannot be changed.