Nov 23 - 29, 2009

Inflation is a key indicator of a country and provides important insight on the state of the economy and the sound macroeconomic policies that govern it.

A stable inflation not only gives a nurturing environment for economic growth, but also uplifts the poor and fixed income citizens who are the most vulnerable in society. Inflation is the rise in the prices of goods and services in an economy over a period.

Inflation skyrocketed to over 25 percent by the end of last year due to rising budget deficit attributed to the steadily rising oil subsidies at a time when the international price of oil began its inexorable rise in July 2007. The disastrous policy to subsidise oil and its products was only reversed when the Pakistan economy, suffering from a critical foreign exchange reserve situation, was forced to go on the IMF programme.

Today, most economists favour a low steady rate of inflation. There are many causes for inflation, depending on a number of factors. For example, inflation can happen when governments print an excess of money to deal with a crisis. When any extra money is created, it will increase some societal group's buying power. As a result, prices end up rising at an extremely high speed to keep up with the currency surplus. All sectors in the economy try to buy more than the economy can produce. Shortages are then created and merchants lose business. To compensate, some merchants raise their prices.

Another common reason of inflation is a rise in production costs, which lead to an increase in the price of the final product. For example, if prices of raw materials are increased, this leads to up in the cost of production this in turn leads to the company increasing prices to maintain their profits. This kind of inflation is called cost-push inflation.

Furthermore, rising labour costs can also lead to inflation, because workers demand wage increases, and companies usually choose to pass on those costs to their customers. This sort of inflation is called wage-push inflation.

Pakistan publishes four different price indices: the consumer price index (CPI), the wholesale price index (WPI), the sensitive price index (SPI) and the GDP deflator.

The CPI is the main measure of price changes at the retail level. It indicates the cost of purchasing a representative fixed basket of goods and services consumed by private households. In Pakistan, the CPI covers the retail prices of 374 items in 35 major cities and reflects roughly the changes in the cost of living of urban areas.

The WPI is designed for those items, which are mostly consumable in daily life on the primary and secondary level; these prices are collected from wholesale markets as well as from mills at organised wholesale market level. It covers the wholesale price of 106 commodities prevailing in 18 major cities of Pakistan.

The SPI shows the weekly change of price of 53 selected items of daily use consumed by those households whose monthly income in the base year 2000-01 ranged from Rs3000 to above Rs12000 per month. The SPI also informs about the actual position of supply whether the commodity is available in market or not. If the commodity is not available, the reason for that is also recorded. It is based on the prices prevailing in 17 major cities and is computed for the basket of commodities being consumed by the households belonging to all income groups combined as in CPI.

Already under tremendous pressure of the high inflation, the low-income group finds it difficult to meet their basic needs.

Business leaders told Page that State Bank of Pakistan (SBP) needed to immediately announce cut in interest rate, which is a prerequisite to enhance productivity.

"At a time when the whole industry was badly suffering due to high cost of doing business and complaining of being uncompetitive in the global market, right steps in right directions are not being taken," they lamented.

According to them, imbalances in the economy such as increasing trade deficit, current account deficit, high saving and investment gap, huge government borrowing and persistent high inflation including food inflation would leave a very negative impact on the national economy.

They suggested that the SBP in consultation with all trade bodies in the country should evolve long-term policies for extending loans to the business community as a large number of businesses had fallen prey to short-term and ad hoc policies.

They said China was extending loans to its industry at 9.5 to 11.5 percent markup. Pakistani industrialists could not compete with them in the global market. They said that all the times the markup rate was increased under the pretext of high inflation while controlling the inflation was not the job of industrialists but it was purely an assignment of the central bank.

The Lahore Chamber of Commerce and Industry (LCCI) President Zafar Iqbal Chaudhry expressed concern over the Federal Minister for Finance Shaukat Tarin's remarks regarding corruption of Rs 400 to 500 billions by government departments and called for revamping the whole system on war footing.

"LCCI is always of the opinion that the business community is fulfilling its national obligations fully but the unscrupulous elements in the government departments are defaming them to save their own skins. There is a need to revamp tax collection institution both at the federal and provincial levels," he said.

He urged the business community to come forward and identify shortfalls in tax collection system and irregularities in government departments so that they could be forwarded to the concerned government authorities in the larger national interests. He also suggested the government machinery to encourage large taxpayers and appreciate their role for uplifting of the national economy, as it would also help attract more and more people to pay their taxes.