Mounting inflationary pressures were continued to
erode the purchasing power of the average income group to an alarming
proportion of the society and if these are allowed to persist they
could impair the production and investment activities which might
result in destabilizing socio-political harmony in the country.
According to the data released by the Federal
Bureau of Statistics consumer price index for the month of February
2005 was 9.95 higher as compared to February last year.
The State Bank of Pakistan (SBP) report anticipates
that inflation may rise to about 9 percent during the current
financial year as compared to 4.6 percent last year.
The SBP report concludes that the inflationary
pressure on the economy remains worrisome as it threatens macro
economic stability and economic growth in the long run.
Compared on a month to month basis, the figure
recorded in February 2005 was the highest increase in inflation since
September 1997 when the rate was 10.29 percent.
While the group wise analysis showed that food and
beverage component of the CPI rose by 12.91 percent, while house rents
increased by 12.34 percent during February. The persistent high rate
of inflation during past eighth months of the current fiscal year
warns that full year inflationary impact would end up somewhere
between nine and ten percent, higher than the revised target of 7
The initial target for inflation during 2004-05, it
may be noted, was only 5.0 percent, while the economy was expected to
grow by 6.6 percent. In simpler terms, goods and services available
for Rs. 1000 a year ago can now had for about Rs.1100. 10 percent
erosion in the purchasing power during such a short period spells
misery for the common people whose wages are almost fixed. The
situation of the poor and the unemployed is bound to be much worse
The situation is may further aggravate in the
coming weeks when gas and electricity tariff are likely to be revised
upward and oil price hike after every 15 days.
The government, which avoided a debate on price
hike in the senate, sensing the angry mood of members, the senate
Chairman blocked the promised debate by prolongs discussion on other
issues. Those who moved the motion alleged that the government was
blind and deaf towards the problems, sufferings and cries of the
The price hike has made the situation rather worst
in the case of old retired pensioners who are living on their savings.
The rate of interest on various types of saving schemes has been
drastically cut down with the plea that the inflation had come down to
3-4 percent. Profit on saving accounts on which these senior citizen
live call for immediate upward revision in view of the latest rate of
inflation. A high rate of economic growth becomes meaningless when a
high inflation rate saps the purchasing power of the consumers.
Such a negative development was in the making for a
long time due to complacency of the policy makers who were
overconfident that the low inflation rate of the last few years could
probably be maintained despite their expansionary policies and other
The revenue collecting authorities have failed to
expand the tax base especially in the direct tax regime.
The State Bank was also equally responsible for
allowing inflation to grow sharply because of its lax monetary policy
According to market reports, the liquidity in the
economy rose 15.4 percent during 2001-02, while 18.0 percent during
2002-03 and 19.6 percent in 2003-04 or at a much higher rate as
compared to the GDP growth during the years.
In view of the growing inflationary pressure, the
original credit plan for 2004-05 had projected the money supply growth
at 11.3 percent. This was a deliberate attempt to present the growth
rate of money supply below the nominal GDP growth rate "because
of the monetary overhang for the last couple of years and rising
inflation". Unfortunately, the rate of growth in money supply has
been revised upwards to 14.5 percent during the mid term NCCC meeting.
Such a lax policy, if continued, would naturally fail to contain
The average lending rate in January 2005 remained
around 6.68 percent or even below the inflation rate. This has made
possible for business circles to use part of the borrowed money to
build up inventories and speculate in real estate and stock market
On the other hand, depositors in the banking system
have no incentive on their savings. The low interest rates are one of
the main reasons for unprecedented expansion in private sector credit
and high increase in money supply. However, the State Bank has been
increasing interest rates by offering higher yields on TBs and PIBs
but the tightening of monetary policy appears too late and too slow.
The central bank in view of its supervisory role
had to be more aggressive to contain inflationary pressure, yet it
seems to be more concerned about growth prospects rather than taking
corrective measures to contain unabated rise in core inflation. The
latest statement by the State Bank Governor that growth and inflation
go together is sure to add to the anxiety of the common people.
The high inflation rate, currently prevailing in
the economy, should not be taken lightly by the economic managers of
the country. Some increase in the rate of inflation due to higher
international oil prices was inevitable no doubt, but its impact can
be minimized by prudent fiscal and monetary measures, especially to
contain demand pressures in the economy.