Inflation may rise to about 9 percent during the current financial year as compared to 4.6 percent last year

From Shamim Ahmed Rizvi,

Mar 28 - Apr 03, 2005



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 percent.

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 than that.

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 common man.

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 lapses.

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 in vogue.

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 inflationary trends.

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 trading.

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.