CONTAINING INFLATION A GIGANTIC TASK BUT NOT IMPOSSIBLE

KANWAL SALEEM
(feedback@pgeconomist.com)

Oct 8 - 14, 20
12

For macroeconomic policymakers, price control is one of their biggest tasks, but it is made all the more difficult when food prices rise more than usual, given the number of external, structural, and demand factors involved in maneuvering food prices. Among others, these factors can include international food prices, subsidies, and the quantity of food crops produced in a particular year and previous years.

Over the last few years, the problem of increasing food prices both in Pakistan and globally has become a severe one. While there may be different reasons for the recent increase in prices, we have followed a relatively basic economic approach and developed a model including per capita income, agricultural output, agricultural subsidies, money supply, and world food prices as key determinants of food prices in Pakistan.

The negative association of per capita income and food prices may imply Engle aggregation, i.e., that the percentage of expenditures on food items declines with an increase in income. The inflation rate in Pakistan was recorded at 8.79 percent in September of 2012. Historically, from 2003 until 2012, Pakistan inflation rate averaged 10.6 Percent reaching an all time high of 25.3 Percent in August of 2008 and a record low of 1.4 Percent in July of 2003. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy.

The per capita income means the average income of whole population in a country in a year. The per capita income in Pakistan is marginally up by 0.2 per cent to $1,256.8 in 2011-12, the slowest growth in recent past, which reflects the dismal performance of the economy.

Statistics made available to PAGE shows this could mean a paltry jump of $2.8 per capita for 178.91 million population in 2011-12. The per capita income in 2010-11 was reported at $1,254.

The economists define per capita income as Gross National Product at current market price in dollar terms divided by the country's population. They maintained that the marginal increase in per capita income indicates the poor economic situation. "This reflects the state of economy where investment is at a 16-year low and saving is the lowest in the history of this country at 5.8 of GDP," they said.

The per capita income was $586 in 2002-03, which rose to $926 in 2006-07 and $1,085 in 2007-08 but now jumped to $1,256.8. However, many economists have widely contested this increment in the per capital income of the people of this country.

In rupee terms, the per capita income grew by 11.9 per cent to Rs 114,370 in 2011-12 as against Rs 102,180 in 2010-11. By taking exchange rate at an average of Rs91 against a dollar the per capita income climbed to $1,256.8 per person this year. Even this marginal growth was mainly driven by the highest ever increase in remittances from the overseas Pakistanis. The trend in growth declined because of small increase in the population.

Statistics show the growth in population was up by 2.1 per cent in 2011-12 to 178.91 million as against 175.31 million in 2010-11. This increase in population is also claimed to have led to decline in growth in per capita income.

The government projected that the economy will grow by 3.7 per cent by end of this fiscal year ending June 30, 2012 against the target of 4.2 per cent and actual growth of 3 per cent in 2010-11.

As a result of stagnation in economic growth in the past three years, the per capita income also did not witness any substantial growth in dollar term. But the real purchasing power of the people also eroded rapidly as inflation entered into double-digit making essential goods dearer.

The per capita income in Pakistan has increased due to large inflow of home remittances from the overseas Pakistanis. This year the remittances were expected to cross the $12 billion-mark, which would be the highest in the country's history.

The relationship between growth and inflation depends on the state of the economy. High growth, without an increase in inflation, is possible if the productive capacity or potential output of the economy is growing enough to keep pace with demand. This is also possible if the actual output is below the potential output and there is sufficient spare capacity available to cope up with the demand pressures.

Vicious circle of poverty is the largest reason of low per capita income. Developing countries including Pakistan are trapped into poverty, while unemployment, lack of foreign investment, use of outdated technology, high utility charges, poor absence of proper credit facilities, low level of productivity, poor savings, high burden of taxes, non-developmental expenditures, poor governance, rising population growth, illiteracy are giving rise to low income.

In the backdrop of poor investment climate, load shedding of gas and electricity, poor law & order problem and host of other challenges, controlling inflation is rather impossible. If we want to bring down soaring inflation, our policy makers would have to ensure fiscal discipline, improve law & order situation, set priorities, improve governance and provide maximum opportunities for trade liberalization so that with boost in economic activities, job opportunities could be created that would help increase per capita income apart from ensuring prosperity.