POST-FLOOD INFLATION CHALLENGE

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)
Oct 11 - 17, 20
10

Inflation in Pakistan is expected to accelerate to 13.5 per cent in the current fiscal year 2010-11 as massive summer floods push up prices for food and other staples, the IMF said in its country report. Prior to the disaster, the IMF had projected average inflation for the current fiscal year 2010-11 at 11.5 per cent, slightly below the 11.7 per cent seen last year.

Analysts believe that the government borrowing from the central bank is expected to mount in the wake of meeting heavy flood-related expenditures, which could further heat up fiscal and inflationary pressures. Inflation is forecast to rise further owing to hike in the power tariffs and expansionary fiscal policy.

Despite being an agricultural country, Pakistan has been importing food items from other countries. The government paid no attention to the development of agriculture sector. The population has also increased 24 per cent in the last ten years and agriculture product has increased only five per cent.

Out of the country's total cultivated area of 52.4 million acres, where wheat, cotton, rice and sugarcane are the major crops contributing seven per cent of GDP, so far 0.1 million acres of cotton crop have already been wiped out in Khyber-Pakhtunkhwa and Punjab by the worst floods, which are now ravaging agriculture in Sindh province. The recent floods could cause shortage of food commodities in future. Destruction of entire villages and towns, infrastructure, livestock and crops, in addition to large-scale human displacement, necessitates urgent provision of supplies.

If the government does not chalk out a comprehensive strategy for this issue on urgent basis, worst food crisis in likely in the country, APP reported, citing Dr Shahid Hasan Sidiqui, an agriculture expert. The experts advise that more barren land should be used for cultivation to control the possible shortage of food.

The potential loss in the country's agriculture output could cause a rise in already high inflation, while fiscal pressure could mount due to reconstruction, subsidies, and relief efforts. The full impact of flood has yet to be calculated, which requires hundreds of billions of rupees to mitigate the consequences facing at least four millions people in the country.

Inflation rose to a four-month high in August to 13.23 per cent as the country's devastating floods forced food prices to increase, according to Federal Bureau of Statistics. The annual inflationary growth in August is the highest since April, when it was 13.26 per cent. Food prices in August rose 15.6 per cent from a year earlier.

The inflation, which was 12 per cent in 2007-08, rose to 20.8 per cent in 2008-9. It came down to 11.7 per cent in 2009-10. The security situation and re-payment of loans have been the main factors contributing to the rise in inflation.

Sensitive price indicator (SPI) inflation for the week ended on September 30 for the lowest income group up to Rs3,000 has registered a nominal increase of 0.02 per cent over the previous week, according to the Federal Bureau of Statistics (FBS). The SPI for the week under review in the lowest income group was recorded at 285.78 points against 285.72 points registered during the previous week. The SPI for the combined group registered a growth of 0.08 per cent as it went up from 272.16 points in the previous week to 272.37 points during the week under review. The SPI for the combined group during the week under review witnessed an increase of 19.44 per cent, against the corresponding week last year.

Pakistan's central bank has indicated that its tight monetary policy will continue in the current fiscal year 2010-11 (July-June) after the bank on September 29 raised its key policy rate to a 17-month high of 13.5 per cent from 13 per cent on concerns of high inflation. The analysts project the discount rate to reach 14.5 percent from 13.5 percent by the end of current fiscal year given the current outlook on inflation and the fiscal deficit.

Newly appointed Pakistan's central bank chief Shahid Kardar raised the bank's benchmark interest rate by 50 basis points to 13.5 per cent, as he announced his first monetary policy for October and November last month. This was for the second time in two months of the current fiscal year 2010-11 that the country's central bank increased the discount rate to control inflation after the country's most devastating floods washed away crops, roads, and bridges. Analysts believe that the central bank had no option but to continue its tight monetary stance, given the country's uncertain economic outlook with persistent inflationary pressures especially after the floods.

Poor fiscal position and difficult monetary indicators actually forced the central bank to tighten its stance on the monetary tightening.

'The monetary policy stance is formed by the consideration that the impact of continued inflation is substantial and felt by the entire economy,' the State Bank of Pakistan (SBP) said in its monetary policy statement on Wednesday. 'A tightening of the stance is thus called for in full recognition that the difficulty to contain fiscal deficit has resulted in the private sector bearing the full brunt of such an adjustment.'

Critics say that the hike in interest rate will act as an upshot to inflation and prices of consumer goods will multiply owing to increased cost of manufacturing and doing business. Businesspersons call it anti-industry move of the central bank, which has given another blow to the ailing industry by raising half a percent bank rate and fear that the raise in interest rate would bring the remaining industries on the verge of collapse.

The country's economic outlook has deteriorated sharply as a result of the floods. The government estimates the floods damaged $3.3 billion of crops, causing food shortages.

Pakistan will harvest 4.4 million metric tonnes of rice in the 12 months starting November 1, down 35 per cent from the previous year, Bloomberg reported citing a report by a unit of the US Department of Agriculture.

The task of disciplining the government's spending will be the hardest challenge for the new Governor Kardar given the government's increasing needs to pay the bill to the tune of hundreds of billions of rupees for post-flood reconstruction and its inability to raise enough tax revenues and foreign assistance to support its budget. Slow economic growth and high inflation require high degree of skills to maintain balance for future of economy in the country.